10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549     

FORM 10-K

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to    

Commission file number 001-33678

NOVABAY PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	68-0454536
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2000 Powell Street, Suite 1150, Emeryville, California 94608

(Address of principal executive offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (510) 899-8800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value per share	NYSE MKT

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes ☐    No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes ☐    No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒

As of June 30, 2016, the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sale price of such stock as of such date on the NYSE Mkt, was approximately $7,530,005. This figure excludes an aggregate of 6,144,900 shares of common stock held by officers and directors as of June 30, 2016. Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

As of March 22, 2017, there were 15,288,175 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the Proxy Statement for the 2017 Annual Meeting of Stockholders expected to be held in June 2, 2017.

NOVABAY PHARMACEUTICALS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

TABLE OF CONTENTS

		Page
PART I
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	6
ITEM 1B.	UNRESOLVED STAFF COMMENTS	13
ITEM 2.	PROPERTIES	13
ITEM 3.	LEGAL PROCEEDINGS	13
ITEM 4.	MINE SAFETY DISCLOSURES	13
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	13
ITEM 6.	SELECTED FINANCIAL DATA	15
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	24
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	26
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	60
ITEM 9A	CONTROLS AND PROCEDURES	61
ITEM 9B.	OTHER INFORMATION	61
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	61
ITEM 11.	EXECUTIVE COMPENSATION	62
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	62
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	62
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	62
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	62

Unless the context requires otherwise, all references in this report to “we,” “our,” “us,” the “Company” and “NovaBay” refer to NovaBay Pharmaceuticals, Inc. and its subsidiaries. Further, all references to “we,” “us,” “our,” “the Company,” or “NovaBay” herein refer to the California corporation prior to the date of the Reincorporation (as defined below), and to the Delaware corporation on and after the date of the Reincorporation.

NovaBay^®, NovaBay Pharma^®, Avenova^®, NeutroPhase^®, CelleRx^®, AgaNase^®, Aganocide^®, AgaDerm^®, Neutrox^™ and Going Beyond Antibiotics^® are trademarks of NovaBay Pharmaceuticals, Inc. All other trademarks and trade names are the property of their respective owners.

On December 18, 2015, the Company effected a 1-for-25 reverse split of its common stock. The accompanying financial statements and related notes give retroactive effect to this reverse stock split.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. These forward-looking statements include, but are not limited to, statements regarding our product candidates, market opportunities, competitions, strategies, anticipated trends and challenges in our business and the markets in which we operate, and anticipated expenses and capital requirements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Item 1A of this report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this report and the documents that we reference and have filed as exhibits thoroughly and with the understanding that our actual future results may be materially different from what we expect. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

PART I

ITEM 1. BUSINESS

Overview 

We are a pharmaceutical company that develops, manufactures, and markets innovative anti-infective products for a multitude of uses. However, we are predominantly focused on commercializing prescription Avenova^® for the domestic eye care market in the United States.

 Avenova is the only eye care product formulated with our proprietary, stable and pure form of hypochlorous acid (marketed as Neutrox^®). By replicating the antimicrobial chemicals used by white blood cells to fight infection, Avenova has proven in laboratory testing to have broad antimicrobial properties. It removes microorganisms and debris from the skin on the eyelids and lashes without burning or stinging. It is also the only commercial product clinically validated to reduce bacterial load on the ocular skin surface, the buildup of which can cause the chronic eye condition blepharitis.

 In November 2015, we introduced a new business strategy to restructure our business and focus on growing sales of Avenova in the United States.  This new strategy allowed us to achieve our goal of reaching adjusted positive cash flow from operations (excluding working capital changes) by the end of 2016. Our current three-part business strategy is comprised of: (1) focusing our resources on growing the commercial sales of Avenova in the U.S. eye care market, including the implementation of an innovative sales and marketing strategy to increase product margin and profitability; (2) significantly reducing expenses through the restructuring of our operations and other cost reduction measures; and (3) seeking additional sources of revenue through partnering, divesting and/or other means of monetizing non-core assets in urology, dermatology, and wound care.

 In addition to Avenova, we have also developed other commercial products containing Neutrox, including NeutroPhase^® for the wound care market and CelleRx for the dermatology market. We have partnerships for NeutroPhase in the U.S., as well as select overseas markets, most notably China.

Avenova

Based on positive sales performance in 2015, we incrementally grew our salesforce to 49 medical sales representatives in 2016 and to 55 in January 2017. Having previously been managed through a professional employer organization, we transitioned our contract salesforce to direct employees of the Company in January 2017. This marked an important milestone in establishing ourselves as a truly consolidated company under the direction of one management team. We believe we are poised for success with all our sales representatives having extensive experience with eye care products and medical devices, a skill set critical for rapid adoption of Avenova in the marketplace.

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We currently believe our target market to be the estimated 30 million Americans who suffer from blepharitis and chronic dry-eye. To access our target market, our salesforce is calling on a base of prescribers that includes the approximately 17,000 ophthalmologists and approximately 37,000 optometrists in the U.S. Our sales and marketing campaign targets major urban areas such as New York, Los Angeles, Boston, Atlanta, and San Francisco.

 Avenova offers distinct advantages, when compared to alternative regimens that contain soaps, bleach, and other impurities, as it removes unwanted microorganisms from the skin without the use of harmful ingredients such as detergents and bleach.  The removal of these harmful items helps control eyelid inflammation, itching and other painful symptoms. Many key opinion leaders in the field of ophthalmology and optometry have embraced Avenova as a tool in the management of lid and lash hygiene and have joined our Ophthalmic and Optometry Advisory Boards (the “Advisory Boards”) to promote its use among their peers. Our Advisory Board members are essential in our goal of educating other physicians that Avenova, used twice daily, is well suited for treating a variety of chronic eye conditions.

 Because prescription Avenova has been shown to neutralize bacterial toxins in vitro, it was specifically designed for daily eyelid hygiene. It is the only commercially available product to be clinically validated in a multicenter study to significantly reduce the bacteria that can cause blepharitis.  Data from the clinical study showed that Avenova reduced the bacterial load on ocular skin surface by more than 90% (S. epidermidis by 99.5%) within 20 minutes of use without affecting the diversity of the remaining bacteria.  Results of this clinical study were presented at the Association for Research in Vision and Ophthalmology (“ARVO”) annual meeting in May 2016. We expect to present data from additional clinical studies to further validate the use of Avenova in managing blepharitis and other eye conditions. Avenova may also be useful in pre- and post-surgical settings for LASIK and cataract patients, as well as managing contact lens intolerance. We believe the total potential market for this product is approximately 41 million patients.

We expect continued benefit from the support of the key opinion leaders on the Advisory Board, our active schedule of educational and marketing programs and strong presence at major eye care conferences in the coming months, including the American Academy of Ophthalmology, the American Optometric Association, the American Society of Cataract and Refractive Surgery Conferences and the South-Eastern Congress of Optometry, as well as numerous Vision Expo meetings held around the U.S. We also plan to continue advertising in leading ophthalmic and optometric trade journals. At these meetings, in professional publications, and in surveys, nationally prominent ophthalmologists and optometrists are reporting on patient improvements in eye care from the use of Avenova.

We have distribution agreements with McKesson Corporation, Cardinal Health, and AmerisourceBergen Corporation that make Avenova accessible in 90% of the approximate 67,000 retail pharmacies across the U.S. Avenova also is marketed through the top ophthalmology and optometry networks. These include the Vision Source Independent Optometry Network, the largest independent optometry network in the U.S. representing 2,800 independent optometrist offices, and ALLDocs Optometry Group (also known as The Association of LensCrafters Leaseholding Doctors), the second largest independent optometry group in the U.S., which works closely with its LensCrafters partners.

Throughout 2016 we reported increases in key metrics, including the total number of prescribers, as well as growth in prescription volume as reported by distributors and the number of retail pharmacies ordering Avenova, both of which have been confirmed by third-party prescription data providers. Increases in Avenova volume include growth of Avenova product reorders and new prescriptions.

We expect that our prescription business will be the main driver of long-term Avenova sales growth and gross margin expansion.  We are focusing our primary sales efforts on building our prescription business under a value pricing model. Our strategy is supported by the high percentage rate of insurance reimbursement, with over 90% of Avenova prescriptions filled at pharmacies covered by insurance at the end of 2016. As a result of this focus, we have significantly increased the percentage of total Avenova prescriptions. We are working to improve insurance reimbursement coverage for Avenova and we are aligning our product pricing accordingly.

We also expect to invest in systems that support prescribing physicians’ efforts to educate their patients. We have made it easy for doctors to get Avenova into the hands of patients by providing availability through well-known national pharmacy chains, specialty pharmacies, or directly through the practitioners’ office. Furthermore, in order to ensure consistent pricing, we have instituted rebate cards to ensure the best price for the patient at the pharmacy. This method, combined with reimbursement under insurance plans, could provide us with potential additional revenue upside.

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Competition

There are many companies that sell lid and lash scrubs, most of these are surfactant (soap) based, such as lid scrubs or baby shampoos. Unlike its competitors, Avenova consists of saline and 0.01% pure hypochlorous acid, without the bleach impurities included in competitive offerings. While newer prescription products have recently been commercially launched, they all include bleach or other impurities. Because it lacks these impurities, we believe that physicians and their patients will choose Avenova over other competitive prescription products or over-the-counter (“OTC”) soap products.

Strategic Alternatives and Other Assets

The third key aspect of our business strategy is to seek additional sources of revenue through partnering, divesting and/or other means of monetizing non-core assets. We therefore are in the process of seeking additional sources of revenue by licensing or selling select non-core assets in urology, dermatology, and wound care, as described in more detail below.

Aganocide Compounds

 In addition to our Neutrox family of products, we have synthesized and developed a second category of novel compounds also aimed at harnessing the power of white blood cell chemistry to address the global, topical anti-infective market. This second product category includes auriclosene, our lead clinical-stage Aganocide compound, which is a patented, synthetic molecule with a broad spectrum of uses against bacteria, viruses and fungi. Mimicking the anti-infective chemistry and mechanism of action that human white blood cells use against infections, Aganocides possess a significantly reduced likelihood of bacteria or viruses developing resistance, which is critical for advanced anti-infectives. Auriclosene has been designated as a new chemical entity and granted broad composition of matter patent protection to 2028 by the U.S. Patent Office.

AIS (Urology)  

Our urology program utilizes the technology of our Aganocide compounds and is in an advanced stage of clinical development. Statistically significant and clinically meaningful results have been reported from two Phase 2 clinical studies with our Auriclosene Irrigation Solution (“AIS”) in urinary catheter blockage and encrustation (“UCBE”).  We announced the results of a Phase 2b clinical study in September 2016 which demonstrated that AIS, when compared with the product that represents the current standard of care, proved more effective in reducing urinary blockage in patients with chronic indwelling urinary catheters who have repeat history of blockage. In this study, AIS exhibited the potential for rapid decolonization of a range of urologic pathogens. Approximately 100,000 patients in the U.S. currently chronically suffer from UCBE.  We estimate that the healthcare costs to manage these patients is in the billion-dollar range.

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CelleRx (Dermatology).

 Created for cosmetic procedures, CelleRx (0.015% Neutrox) is a gentle cleansing solution that is effective for post-laser resurfacing, chemical peels and other cosmetic surgery procedures. Cosmetic surgeons and aesthetic dermatologists have found that CelleRx results in less pain, erythema, and exudate compared to Dakin solution, which contains bleach impurities. CelleRx is a non-alcohol formulation that doesn’t dry or stain the skin, and most importantly, has been shown to reduce the patient’s downtime post procedure.

 CelleRx is well positioned in the cosmetic surgery and aesthetic dermatology space as an adjunct therapy for the pre/post procedural phase of chemical and laser facial skin peels. Currently many generic creams and salves, as well as home-mixed acetic acid potions, are used for this purpose. We believe that CelleRx is clearly differentiated in this field. CelleRx is unique prescription product with 510(k) clearance as a skin and wound cleanser. CelleRx has proven to be safe, soothing and have an unusually broad spectrum antimicrobial action in solution. Many clinicians have used the product clinically and have reported excellent results.

intelli-Case

 In addition to improving the eyecare of many Americans through promoting Avenova for lid and lash hygiene, we have developed a contact lens case that improves the safety of those contact lens wearers who use hydrogen peroxide solution to disinfect their lenses. In June 2015, we received FDA-clearance for the intelli-Case, a highly innovative, easy-to-use device for use with hydrogen peroxide disinfection solutions for soft and rigid gas permeable contact lenses. More than 24 million Americans disinfect their contact lenses with a multipurpose disinfection system to prevent potentially serious infections. Approximately two million use hydrogen peroxide as a disinfection solution. Many ophthalmologists and optometrists favor the disinfection and lens material compatibility peroxide systems provide, yet side effects associated with misuse and non-compliance minimize peroxide system use. Hydrogen peroxide in too low of a concentration does not fully disinfect lenses and in too high of a concentration can severely irritate the eye.

 The intelli-Case monitors the neutralization of hydrogen peroxide during the disinfection cycle with sophisticated microprocessor electronics embedded in the cap of what otherwise looks like a standard peroxide lens case. The LED indicators on the lid inform the user if the lenses are safe to insert into the eyes, resulting in a disinfection system that is safe yet simple to use. We are seeking potential partners with the resources to make this breakthrough device available to the largest number of contact lens wearers as soon as possible.

NeutroPhase (Wound Care).

We believe that NeutroPhase is a well-suited product to treat the six million patients in the U.S. who suffer from chronic non-healing wounds, such as pressure, venous stasis and diabetic ulcers. Consisting of 0.03% Neutrox, NeutroPhase is used to cleanse and remove microorganisms from any type of acute or chronic wound, and can be used with any type of wound care modality. Recently, NeutroPhase has been found to be an effective irrigation solution as part of the adjunct treatment for Necrotizing Fasciitis (“NF”). Also known as flesh-eating disease, NF typically has a high mortality and amputation rate (30% and 70%, respectively) even with aggressive debridement and antibiotic treatment. In vitro studies have shown that, in solution, NeutroPhase both kills the microorganisms implicated in NF and neutralizes the toxins secreted by the microorganisms. Success using NeutroPhase as an irrigation solution has established it as an effective part of the adjunct treatment for this deadly disease. 

In March 2015, the National Necrotizing Fasciitis Foundation (“NNFF”) named NeutroPhase its official “Flesh Eating Disease” wound cleanser. The NNFF is a non-profit organization established in 1997 by two survivors of the disease. NNFF has evolved to become the world’s leading resource for information regarding necrotizing fasciitis, as well as a repository of cases reported worldwide. 

NeutroPhase is competing in a crowded wound cleanser market with many older and lower-priced products with similar uses. However, we believe NeutroPhase has distinct competitive advantages in a market where there is currently no dominant product. In the U.S. and internationally, NeutroPhase is distributed through commercial partners, such as Pioneer Pharma Company Limited, or “Pioneer,” a Shanghai-based company, for the distribution of NeutroPhase throughout Southeast Asia and mainland China and in the U.S., by Principle Business Enterprise (“PBE”).

U.S. FDA Regulatory Clearance of Neutrox-based Products. We are marketing Avenova, NeutroPhase, and CelleRx as medical devices regulated under the FDA 510(k) process. Avenova and CelleRx fall under the general intended use of skin and wound cleansers. NeutroPhase was cleared by the U.S. FDA “for use under the supervision of healthcare professionals for cleansing and removal of foreign material, including microorganisms and debris from wounds, and for moistening absorbent wound dressings and cleaning minor cuts, minor burns, superficial abrasions, and minor irritations of the skin. It is also intended for moistening and debriding acute and chronic dermal lesions, such as Stage I to IV pressure ulcers, stasis ulcers, leg ulcers, diabetic foot ulcers, post-surgical wounds, first and second degree burns, and grafted and donor sites.

Recent Events

On October 28, 2016, the Company received a letter from the NYSE MKT informing it that the Company is back in compliance with the NYSE MKT continued listing standards set forth in Part 10 of the NYSE MKT Company Guide (the “Company Guide”). Specifically, the Company had resolved the continued listing deficiencies with respect to Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iii) of the Company Guide referenced in the NYSE MKT’s letters dated April 28, 2015, July 10, 2015 and March 17, 2016. The Company is subject to ongoing review for compliance with NYSE MKT requirements as part of the NYSE MKT’s routine monitoring.

4

Equity

In February 2016, we closed a financing with accredited investors in which we raised a total of $2.8 million, or approximately $2.6 million in net cash proceeds after deducting a placement agent commission due to China Kington Asset Management (“China Kington”) and other offering costs of $0.2 million.

In May 2016, we closed the first tranche of an April 2016 financing (the “April 2016 Financing”) in which we raised a total of $7.8 million, or approximately $7.3 million in net cash proceeds after deducting China Kington’s placement agent commission and other offering costs of $0.5 million.

In August 2016, we closed the second tranche of this financing, raising a total of $4.0 million, or approximately $3.8 million in net cash proceeds after deducting China Kington’s placement agent commission and other offering costs of $0.2 million.

During the third quarter of 2016, certain warrant holders exercised warrants in the amount of $6.9 million, or approximately $6.6 million in net cash proceeds after deducting placement agent commissions and other offering costs of $0.3 million.

During the fourth quarter of 2016, certain warrant holders exercised warrants in the amount of $0.9 million, or approximately $0.9 million in net cash proceeds after deducting placement agent commissions and other offering costs of approximately $32 thousand.

For more information on the equity transactions, please see Note 11 to our consolidated financial statements.

Borrowings

In January 2016, in connection with a bridge loan (the “Bridge Loan”) facilitated by China Kington, we issued five (5) promissory notes to certain lenders between December 2015 and January 2016 for an aggregate amount of $3.0 million.

After the closing of the first tranche of the April 2016 Financing, in May 2016, we used $2.5 million of the proceeds to repay the principal on the promissory notes outstanding under the $3.0 million Bridge Loan.

After the closing of the second tranche of the April 2016 Financing, in August 2016 we repaid the final $0.5 million outstanding under the Bridge Loan and all liens on our property and assets associated with the Bridge Loan were released.

Office Lease 

On August 24, 2016, we entered into an Office Lease (the “Lease”), pursuant to which we leased approximately 7,799 rentable square feet of real property located on the eleventh floor (Suite 1150) at 2000 Powell Street, Emeryville, California 94608 from KBSIII Towers at Emeryville, LLC (the “Landlord”), for our new principal executive offices. The expiration date of the Lease is February 28, 2022, unless earlier terminated pursuant to any provision of the Lease. The Company has the option to extend the term of the Lease for one five (5)-year period upon written notice to the Landlord due no earlier than twelve (12) months and no later than nine (9) months prior to the expiration of the Lease.

The Company still has a lease commitment for the laboratory facilities and office space at Suite 550, EmeryStation North Building, 5980 Horton Street, Emeryville, California (“EmeryStation”) under an operating lease which will expire on October 21, 2020. On July 11, 2016, the Company entered into a Sublease Agreement to sublease all 16,465 rentable square feet of real property at EmeryStation (the “Sublease Agreement”). The commencement date under the Sublease Agreement was September 8, 2016. The expiration date of the Sublease Agreement is October 21, 2020, as amended (while the expiration date of the Company’s master lease for the EmeryStation premises is October 31, 2020), unless earlier terminated pursuant to the Company terminating its master lease for EmeryStation or the Sublease Agreement.

Employees

As of December 31, 2016, we had 21 direct full-time employees. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good. In January 2017, we internalized our contract salesforce of 58 medical sales representatives. As of February 28, 2017, we have a total of 78 direct full time employees.

5

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our corporate website, located at www.novabay.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks, the most important of which are discussed below. You should consider carefully the following risks in addition to the other information contained in this report and our other filings with the SEC before deciding to buy, sell or hold our common stock. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our common stock could decline and you may lose all or part of your investment. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also impair our business operations.

Risks Relating to Our Liquidity

We have a history of losses and we may never achieve or maintain sustained profitability. 

We have historically incurred net losses and we may never achieve or maintain sustained profitability. In addition, at this time:

• we expect to incur substantial marketing and sales expenses as we continue to attempt to increase sales of our Avenova product

• our results of operations may fluctuate significantly;

• we may be unable to develop and commercialize our product candidates; and

• it may be difficult to forecast accurately our key operating and performance metrics because of our limited operating history.

We will need to generate significant revenues to achieve and maintain profitability. If we cannot successfully market and sell Avenova, either independently or with partners, we will not be able to generate sufficient revenues to achieve or maintain profitability in the future. Our failure to achieve and subsequently maintain profitability could have a material adverse impact on the market price of our common stock.

Risks Relating to Owning Our Common Stock

If we conduct offerings in the future, the price at which we offer our securities may trigger a price protection provision included in warrants originally issued in July 2011, March 2015 and October 2015, reducing the probability and magnitude of any future share price appreciation. 

As part of our October 2015 offering, we agreed to provide certain price protections affecting currently outstanding warrants exercisable for an aggregate of 565,695 shares of our common stock, of which 281,093 shares must be issued, if at all, by March 6, 2020, and 284,602 shares must be issued, if at all, by October 27, 2020 (the “Warrants”). Specifically, in the event that we undertake a third-party equity financing of either: (1) common stock at a sale price of less than $5.00 per share; or (2) convertible securities with an exercise price of less than $5.00 per share, we have agreed to reduce the exercise price of all Warrants to such lower price. The exercise price of the Warrants is currently set at $1.81 as a result of our February 2016 private placement offering. The further reduction of the exercise price for the Warrants would limit the probability and magnitude of future share price appreciation, if any, by placing downward pressure on our stock price if it exceeds such offering sale price. All of the Warrants are currently exercisable and will remain so after any exercise price adjustment. In the past, we have extended the expiration dates or adjusted other terms of the Warrants as consideration for certain offering conditions, and we cannot assure you that we will not do so in the future. Any such modifications would reduce the probability and magnitude of any share price appreciation during the period of the extension. We cannot guarantee that you will receive a return on your investment when you do sell your shares or that you will not lose the entire amount of your investment. If you do receive a return on your investment, it may be lower than the return you would have realized in the absence of the price protection provisions discussed hereof.

6

The price of our common stock may fluctuate substantially, which may result in losses to our stockholders. 

The stock prices of many companies in the pharmaceutical and biotechnology industry have generally experienced wide fluctuations, which are often unrelated to the operating performance of those companies. The market price of our common stock is likely to be volatile and could fluctuate in response to, among other things:

● the announcement of new products by us or our competitors;             

● the announcement of partnering arrangements by us or our competitors;             

● quarterly variations in our or our competitors’ results of operations;             

● announcements by us related to litigation;             

● changes in our earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;             

● developments in our industry; and             

● general, economic and market conditions, including volatility in the financial markets, a decrease in consumer confidence and other factors unrelated to our operating performance or the operating performance of our competitors.

The volume of trading of our common stock may be low, leaving our common stock open to the risk of high volatility. 

The number of shares of our common stock being actively traded may be very low and any stockholder wishing to sell his, her, or its stock may cause a significant fluctuation in the price of our stock. We have a number of large stockholders, including our principal stockholders China Pioneer Pharma Holdings Limited (“China Pioneer”), Pioneer Pharma (Hong Kong) Company Limited as a wholly-owned subsidiary of China Pioneer and the recipient of all of the holdings of Pioneer Pharma (Singapore) Pte. Ltd. pursuant to an internal corporate reorganization of China Pioneer (“Pioneer Hong Kong”) and Mr. Jian Ping Fu. Each of China Pioneer and Mr. Fu own 34% and 26% of our common stock, respectively. The sale of a substantial number of shares of common stock by such large stockholders within a short period of time could cause our stock price to decrease substantially. In addition, low trading volume of a stock increases the possibility that, despite rules against such activity, the price of the stock may be manipulated by persons acting in their own self-interest. We may not have adequate market makers and market making activity to prevent manipulation.

Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a third party from making a takeover offer that is beneficial to our stockholders.

Anti-takeover provisions of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. The provisions of our charter documents include:

● a classified board so that only one of the three classes of directors on our Board of Directors is elected each year;

● elimination of cumulative voting in the election of directors;             

● procedures for advance notification of stockholder nominations and proposals;             

● the ability of our Board of Directors to amend our bylaws without stockholder approval; and             

● the ability of our Board of Directors to issue up to 5,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our Board of Directors may determine.

In addition, as a Delaware corporation, we are subject to the Delaware General Corporation Law (“DGCL”), which includes provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of our Company. Provisions of the DGCL could make it more difficult for a third party to acquire a majority of our outstanding voting stock by discouraging a hostile bid, or delaying, preventing or deterring a merger, acquisition or tender offer in which our stockholders could receive a premium for their shares, or effect a proxy contest for control of NovaBay or other changes in our management.

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock. 

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our Board of Directors may consider relevant. If we do not pay dividends, you will experience a return on your investment in our shares only if our stock price appreciates. We cannot assure you that you will receive a return on your investment when you do sell your shares or that you will not lose the entire amount of your investment.

7

China Pioneer, Pioneer Hong Kong, Mr. Jian Ping Fu and/or China Kington might influence our corporate matters in a manner that is not in the best interest of our general stockholders. 

As of March 1, 2017, China Pioneer beneficially owns approximately 34% of our common stock. Our director Mr. Xinzhou “Paul” Li is the chairman of China Pioneer. Pursuant to the arrangement of our Bridge Loan, two (2) of our directors were nominated by China Kington, including Mr. Mijia “Bob” Wu, who is the Managing Director of China Kington and Non-Executive Director of Pioneer Hong Kong, and Mr. Xiaoyan “Henry” Liu, who has worked closely with China Kington on other financial transactions in the past. Mr. Jian Ping Fu beneficially owns approximately 26% of our common stock. China Kington and its affiliates have served as placement agent for three purchases of Company securities by Mr. Fu during the last year.

As a result, China Pioneer, Pioneer Hong Kong as a wholly-owned subsidiary of China Pioneer and China Kington have input on all matters before our Board of Directors and may be able to exercise significant influence over all matters requiring board and stockholder approval. Please see the risk factor entitled “We may be unable to raise additional capital on acceptable terms in the future, which may in turn limit our ability to develop and commercialize products and technologies.” China Pioneer, Pioneer Hong Kong and China Kington may choose to exercise their influence in a manner that is not in the best interest of our general stockholders.

In addition, were China Pioneer, Pioneer Hong Kong and Mr. Fu to cooperate, they could unilaterally elect all of their preferred director nominees at our 2017 Annual Meeting of Stockholders. Even with our classified board, China Pioneer, Pioneer Hong Kong and Mr. Fu could ensure that five (5) of our eight (8) directors are either nominees of China Pioneer, Pioneer Hong Kong or China Kington. In the interim, China Pioneer, Pioneer Hong Kong, China Kington and/or Mr. Fu could exert significant indirect influence on us and our management.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. 

Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss (“NOL”) carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. Since our formation, we have raised capital through the issuance of capital stock on several occasions which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in one or more changes of control, as defined by Section 382 of the Code. We have not currently completed a study to assess whether any change of control has occurred, or whether there have been multiple changes of control since our formation, due to the significant complexity and cost associated with such study. If we have experienced a change of control at any time since its formation, its NOL carryforwards and tax credits may not be available, or their utilization could be subject to an annual limitation under Section 382. In addition, since we may need to raise additional funding to finance our operations, we may undergo further ownership changes in the future. If we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset United States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

Risks Relating to Our Business

Our future success is largely dependent on the successful commercialization of Avenova. 

The future success of our business is largely dependent upon the successful commercialization of Avenova. We are dedicating a substantial amount of our resources to advance Avenova as aggressively as possible. If we encounter difficulties in its commercialization, we may not have the resources necessary to continue our business in its current form. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities or enter into or maintain agreements with third parties to do so, we may be unable to successfully commercialize our products. We believe we are creating an efficient commercial organization. However, we may not be able to correctly judge the size and experience of the sales and marketing force and the scale of distribution necessary to be successful. Establishing and maintaining sales, marketing, and distribution capabilities are expensive and time-consuming. Such expenses may be disproportionate compared to the revenues we may be able to generate on sales of Avenova.

8

Our commercialized products are not approved by the FDA as a drug, so we rely solely on the 510(k) clearance of Neutrox as a medical device. 

Our business and future growth depend on the development, use and sale of products that are subject to FDA regulation, clearance and approval. Under the U.S. Federal Food, Drug, and Cosmetic Act and other laws, we are prohibited from promoting our products for off-label uses. This means that we may not make claims about the safety or effectiveness of our products and may not proactively discuss or provide information on the use of our products, except as allowed by the FDA. As a medical device, our claims regarding efficacy are limited. Without claims of efficacy, market acceptance of our products may be slow.

There is a risk that the FDA or other federal or state law enforcement authorities could determine that the nature and scope of our sales and marketing activities may constitute the promotion of our products for a non-FDA-approved use in violation of applicable law. We also face the risk that the FDA or other regulatory authorities might pursue enforcement based on past activities that we have discontinued or changed, including sales activities, arrangements with institutions and doctors, educational and training programs and other activities.

Government investigations concerning the promotion of off-label uses and related issues are typically expensive, disruptive and burdensome and generate negative publicity. If our promotional activities are found to be in violation of applicable law or if we agree to a settlement in connection with an enforcement action, we would likely face significant fines and penalties and be required to substantially change our sales, promotion, grant and educational activities. In addition, were any enforcement actions against us or our senior officers to arise, we could be excluded from participation in U.S. government healthcare programs such as Medicare and Medicaid.

We do not have our own manufacturing capacity, and we rely on partnering arrangements or third-party manufacturers for the manufacture of our products and potential products. 

We do not currently operate manufacturing facilities for production of our product and product candidates. We have no experience in product formulation or manufacturing, and we lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. As a result, we have partnered and expect to partner with third parties to manufacture our products or rely on contract manufacturers to supply, store and distribute product supplies for our clinical trials. Any performance failure on the part of our commercial partners or future manufacturers could delay clinical development or regulatory approval of our product candidates or commercialization of our products, producing additional losses and reducing or delaying product revenues.

Our products and product candidates do and will require precise, high-quality manufacturing. The failure to achieve and maintain high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. Contract manufacturers and partners often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. These manufacturers and partners are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with Quality Systems Regulations, current Good Manufacturing Practice and other applicable government regulations and corresponding foreign standards. If any of our manufacturers or partners fails to maintain compliance, the production of our products could be interrupted, resulting in delays, additional costs and potentially lost revenues.

In addition, if the FDA or other regulatory agencies approve any of our product candidates for commercial sale, we will need to manufacture them in larger quantities. Significant scale-up of manufacturing will require validation studies, which the FDA must review and approve. If we are unable to successfully increase the manufacturing capacity for a product, the regulatory approval or commercial launch of any products may be delayed or there may be a shortage in supply and our business may be harmed as a result.

We depend on skilled and experienced personnel and management leadership to operate our business effectively and maintain our investor relationships. If we are unable to retain, recruit and hire such key employees, our ability to manage our business will be harmed, which would impair our future revenue and profitability. 

Our success largely depends on the skills, experience and efforts of our officers and other key employees. The efforts of our officers and other key employees are critical to us as we continue to focus on the commercialization of our Avenova product with the goal of achieving positive cash flow from operations by the end of 2016. The loss of any of our senior management team members could disrupt our business, affect key partnerships and impair our future revenue and profitability. In particular, our Chief Executive Officer, Mark M. Sieczkarek, is critical to our successful commercialization of Avenova, and we have entered into an executive employment agreement with him, expiring on May 31, 2017.

9

We intend to rely on a limited number of pharmaceutical wholesalers to distribute Avenova. 

We intend to rely primarily upon a limited number of pharmaceutical wholesalers in connection with the distribution of Avenova. If we are unable to establish or maintain our business relationships with these pharmaceutical wholesalers on commercially acceptable terms, it could have a material adverse effect on our sales and may prevent us from achieving profitability.

If we grow and fail to manage our growth effectively, we may be unable to execute our business plan. 

Our future growth, if any, may cause a significant strain on our management and our operational, financial and other resources. Our ability to grow and manage our growth effectively will require us to implement and improve our operational, financial and management information systems and to expand, train, manage and motivate our employees. These demands may require the hiring of additional management personnel and the development of additional expertise by management. Any increase in resources devoted to research and product development without a corresponding increase in our operational, financial and management information systems could have a material adverse effect on our business, financial condition, and results of operations.

Government agencies may establish usage guidelines that directly apply to our products or proposed products or change legislation or regulations to which we are subject. 

Government usage guidelines typically address matters such as usage and dose, among other factors. Application of these guidelines could limit the use of our products and products that we may develop. In addition, there can be no assurance that government regulations applicable to our products or proposed products or the interpretation thereof will not change and thereby prevent the marketing of some or all of our products for a period of time or permanently. The FDA’s policies may change and additional government regulations may be enacted that could modify, prevent or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the U.S. or in other countries.

We and our collaborators are and will be subject to ongoing FDA obligations and continued regulatory review, such as continued safety reporting requirements, and we and our collaborators may also be subject to additional FDA post-marketing obligations or new regulations, all of which may result in significant expense and which may limit our ability to commercialize our medical devices and drug products and candidates. 

Any regulatory approvals that we receive may also be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing follow-up studies. The FDA may require us to commit to perform lengthy post marketing studies, which would require us to expend additional resources and thus could have an adverse effect on our operating results and financial condition. In addition, if the FDA approves any of our drug product candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping for the drug will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the drugs, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the drugs or the withdrawal of the drugs from the market. If we are not able to maintain regulatory compliance, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Any of these events could prevent us from marketing any products we may develop and our business could suffer.

Our past clinical trials may expose us to expensive liability claims, and we may not be able to maintain liability insurance on reasonable terms or at all. 

Even though we have concluded all our clinical trials, an inherent risk remains. If a claim were to arise in the future based on our past clinical trial activity, we would most likely incur substantial expenses. Our inability to obtain sufficient clinical trial insurance at an acceptable cost to protect us against potential clinical trial claims could prevent or inhibit the commercialization of our product candidates. Our current clinical trial insurance covers individual and aggregate claims up to $5.0 million. This insurance may not cover all claims and we may not be able to obtain additional insurance coverage at a reasonable cost, if at all, in the future. In addition, if our agreements with any future corporate collaborators entitle us to indemnification against product liability losses and clinical trial liability, such indemnification may not be available or adequate should any claim arise.

10

The pharmaceutical and biopharmaceutical industries are characterized by patent litigation, and any litigation or claim against us may impose substantial costs on us, place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. 

There has been substantial litigation in the pharmaceutical and biopharmaceutical industries with respect to the manufacture, use and sale of new products that are the subject of conflicting patent rights. For the most part, these lawsuits relate to the validity, enforceability and infringement of patents. Generic companies are encouraged to challenge the patents of pharmaceutical products in the United States because a successful challenger can obtain six months of exclusivity as a generic product under the Hatch-Waxman Act. We expect that we will rely upon patents, trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position, and we may initiate claims to defend our intellectual property rights as a result. Other parties may have issued patents or be issued patents that may prevent the sale of our products or know-how or require us to license such patents and pay significant fees or royalties to produce our products. In addition, future patents may be issued to third parties which our technology may infringe. Because patent applications can take many years to issue, there may be applications now pending of which we are unaware that may later result in issued patents that our products infringe.

Intellectual property litigation, regardless of outcome, is expensive and time-consuming, would divert management’s attention from our business and could have a material negative effect on our business, operating results or financial condition. If such a dispute were to be resolved against us, we might be required to pay substantial damages, including treble damages and attorney’s fees if we were found to have willfully infringed a third party’s patent, to the party claiming infringement, to develop non-infringing technology, to stop selling any products we develop, to cease using technology that contains the allegedly infringing intellectual property or to enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Modification of any products we develop or development of new products thereafter could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. In addition, parties making infringement claims may be able to obtain an injunction that would prevent us from selling any products we develop, which could harm our business.

If product liability lawsuits are brought against us, they could result in costly litigation and significant liabilities. 

Despite all reasonable efforts to ensure safety, it is possible that we or our collaborators will sell products, including Avenova, NeutroPhase, CelleRx, and intelli-Case, which are defective, to which patients react in an unexpected manner, or which are alleged to have side effects. The manufacture and sale of such products may expose us to potential liability, and the industries in which our products are likely to be sold have been subject to significant product liability litigation. Any claims, with or without merit, could result in costly litigation, reduced sales, significant liabilities and diversion of our management’s time and attention, and could have a material adverse effect on our financial condition, business and results of operations.

If a product liability claim is brought against us, we may be required to pay legal and other expenses to defend the claim and, if the claim is successful, damage awards may not be covered, in whole or in part, by our insurance. We may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets. We may also be obligated to indemnify our collaborators and make payments to other parties with respect to product liability damages and claims. Defending any product liability claims, or indemnifying others against those claims, could require us to expend significant financial and managerial resources.

If we are unable to protect our intellectual property, our competitors could develop and market products similar to ours that may reduce demand for our products. 

Our success, competitive position and potential future revenues will depend in significant part on our ability to protect our intellectual property. We rely on the patent, trademark, copyright and trade secret laws of the U.S. and other countries, as well as confidentiality and nondisclosure agreements, to protect our intellectual property rights. We apply for patents covering our technologies as we deem appropriate.

There is no assurance that any patents issued to us or licensed or assigned to us by third parties will not be challenged, invalidated, found unenforceable or circumvented, or that the rights granted thereunder will provide competitive advantages to us. If we or our collaborators or licensors fail to file, prosecute or maintain certain patents, our competitors could market products that contain features and clinical benefits similar to those of any products we develop, and demand for our products could decline as a result. Further, although we have taken steps to protect our intellectual property and proprietary technology, third parties may be able to design around our patents or, if they do infringe upon our technology, we may not be successful or have sufficient resources in pursuing a claim of infringement against those third parties. Any pursuit of an infringement claim by us may involve substantial expense and diversion of management attention.

11

We also rely on trade secrets and proprietary know-how that we seek to protect by confidentiality agreements with our employees, consultants and collaborators. If these agreements are not enforceable, or are breached, we may not have adequate remedies for any breach, and our trade secrets and proprietary know-how may become known or be independently discovered by competitors.

We operate in the State of California. The laws of the State prevent us from imposing a delay before an employee who may have access to trade secrets and proprietary know-how can commence employment with a competing company. Although we may be able to pursue legal action against competitive companies improperly using our proprietary information, we may not be aware of any use of our trade secrets and proprietary know-how until after significant damage has been done to our company.

Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. If our intellectual property does not provide significant protection against foreign or domestic competition, our competitors, including generic manufacturers, could compete more directly with us, which could result in a decrease in our market share. All of these factors may harm our competitive position.  

Our current patent portfolio could leave us vulnerable to larger companies who have the resources to develop and market competing products. 

We aggressively protect and enforce our patent rights worldwide. However, certain risks remain. There is no assurance that patents will issue from any of our applications or, for those patents we have or that do issue, that the claims will be sufficiently broad to protect our proprietary rights, or that it will be economically possible to pursue sufficient numbers of patents to afford significant protection. For example, we do not have any composition of matter patent directed to the Neutrox composition. This relatively weak patent portfolio leaves us vulnerable to competitors who wish to compete in the same marketplace with similar products. If a potential competitor introduces a formulation similar to Avenova or NeutroPhase with a similar composition that does not fall within the scope of the method of treatment/manufacture claims, then we or a potential marketing partner would be unable to rely on the allowed claims to protect its market position for the method of using the Avenova or NeutroPhase composition, and any revenues arising from such protection would be adversely impacted.

If physicians and patients do not accept and use our products, we will not achieve sufficient product revenues and our business will suffer. 

Even if the FDA has cleared or approves product candidates that we develop, physicians and patients may not accept and use them. Acceptance and use of our products may depend on a number of factors including:

● perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our products;

● published studies demonstrating the cost-effectiveness of our products relative to competing products;       

● availability of reimbursement for our products from government or healthcare payers; and             

● effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any.

The failure of any of our products to find market acceptance would harm our business and could require us to seek additional financing.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our principal executive offices and administrative operations are located in Emeryville, California. In total, we lease approximately 7,799 square feet of office space in the facility pursuant to the Lease expiring on February 28, 2022.

The Company also leases laboratory facilities and office space at Suite 550, EmeryStation North Building, 5980 Horton Street, Emeryville, California (“EmeryStation”) under an operating lease which will expire on October 21, 2020. On July 11, 2016, the Company entered into a Sublease Agreement to sublease 16,465 rentable square feet of real property at EmeryStation (the “Sublease Agreement”). The commencement date under the Sublease Agreement was September 8, 2016. The expiration date of the Sublease Agreement is October 21, 2020, as amended (while the expiration date of the Company’s master lease, as amended, for the EmeryStation premises is October 31, 2020), unless earlier terminated pursuant to any provision of the Company’s master lease for EmeryStation, or the Sublease Agreement.

ITEM 3. LEGAL PROCEEDINGS

We are currently not a party to, nor is our property the subject matter of, any pending or, to our knowledge, contemplated material legal proceedings.  From time to time, we may become party to litigation and subject to claims arising in the ordinary course of our business.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on the NYSE MKT, under the symbol “NBY.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the NYSE Mkt, after giving effect to the 1 for 25 reverse stock split:

	2016				2015
	High		Low		High		Low
First Quarter	$	3.42	$	1.77	$	18.75	$	10.50
Second Quarter	$	3.42	$	1.90	$	26.25	$	12.75
Third Quarter	$	5.29	$	2.12	$	17.00	$	5.50
Fourth Quarter	$	5.09	$	3.25	$	9.50	$	1.75

Holders

As of March 7, 2017, there were approximately 37 holders of record of our common stock. This figure does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.

Dividend Policy

We have not paid cash dividends on our common stock since our inception. We currently expect to retain earnings primarily for use in the operation and expansion of our business, therefore, we do not anticipate paying any cash dividends in the near future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under any existing indebtedness and other factors the Board of Directors deems relevant.

13

Performance Graph(1)

The following graph compares our total stockholder returns for the past five years to two indices: the NYSE MKT Composite Index and the RDG MicroCap Biotechnology Index. The total return for each index assumes the reinvestment of all dividends, if any, paid by companies included in these indices and is calculated as of December 31, of each year.

As a member of the NYSE MKT Composite Index, we are required under applicable regulations to use this index as a comparator, and we believe it is relevant since it is composed of peer companies in lines of business similar to ours.

The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

	12/11		12/12		12/13		12/14		12/15		12/16
NovaBay Pharmaceuticals, Inc.		100.00		84.33		91.79		47.01		6.03		9.85
NYSE MKT Composite		100.00		106.15		115.07		118.71		106.60		117.67
RDG MicroCap Biotechnology		100.00		102.30		100.33		94.53		63.14		27.30

(1) This section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

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ITEM 6.  SELECTED FINANCIAL DATA 

The following table presents selected financial information as of and for the dates and periods indicated below which have been derived from our audited consolidated financial statements and other information. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this report and our consolidated financial statements and related notes included elsewhere in this report.

	Year Ended December 31,
	2016			2015			2014			2013			2012
	(in thousands, except per share data)
Statements of Operations Data:
Sales:
Product Revenue, net	$	11,617		$	4,146		$	684		$	223		$	14
Other Revenue, net		280			235			370			3,254			6,933
Total Sales, net		11,897			4,381			1,054			3,477			6,947
Product Cost of Goods Sold		2,464			1,261			486			162			8
Gross Profit		9,433			3,120			568			3,315			6,939
Operating expenses:
Research and development		1,371			5,728			9,483			12,461			9,275
Sales and marketing		11,809			10,523			1,754			—			—
General and administrative		7,235			8,006			6,235			6,366			5,991
Total operating expenses		20,415			24,257			17,472			18,827			15,266
Operating Loss		(10,982	)		(21,137	)		(16,904	)		(15,512	)		(8,327	)
Non-cash gain (loss) on changes in fair value of warrant liability		(2,099	)		2,149			1,664			(555	)		1,439
Other income (expense), net		(68	)		17			48			27			(137	)
Loss before provision for income taxes		(13,149	)		(18,971	)		(15,192	)		(16,040	)		(7,025	)
Provision for income taxes		(2	)		(2	)		(2	)		(2	)		(2	)
Net loss	$	(13,151	)	$	(18,973	)	$	(15,194	)	$	(16,042	)	$	(7,027	)
Loss per share:
Basic	$	(1.40	)	$	(6.82	)	$	(7.65	)	$	(10.51	)	$	(5.97	)
Diluted	$	(1.40	)	$	(6.82	)	$	(7.65	)	$	(10.51	)	$	(5.97	)
Shares used in computing net loss per share:
Basic (after 1 for 25 reverse stock split)		9,408			2,784			1,985			1,527			1,178
Diluted (after 1 for 25 reverse stock split)		9,408			2,784			1,985			1,527			1,178

	2016		2015			2014		2013		2012
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	9,512	$	2,385		$	5,429	$	13,053	$	16,870
Working capital		10,148		(106	)		3,607		11,163		15,108
Total assets		15,381		5,077			7,537		15,650		19,235
Deferred revenue—current and non-current		4,053		2,418			2,425		1,871		1,892
Common stock and additional paid-in capital		110,772		85,422			73,395		64,884		54,373
Total stockholders’ equity (deficit)		7,101		(5,098	)		1,848		8,516		14,049

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part II, Item 8 of this report. This discussion contains forward-looking statements that involve risks and uncertainties. Words such as “expects,” “anticipated,” “will,” “may,” “goals,” “plans,” “believes,” “estimates,” “concludes,” determines,” variations of these words, and similar expressions are intended to identify these forward-looking statements. As a result of many factors, including those set forth under the section entitled “Risk Factors” in Item 1A and elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions based upon assumptions made that we believed to be reasonable at the time, and are subject to risks and uncertainties. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements.

Overview 

We are a pharmaceutical company predominantly focused on eye care. We develop, manufacture and market innovative anti-infective products for a multitude of uses; however, we are currently focused primarily on commercializing prescription Avenova for the domestic eye care market in the United States.

Avenova is the only eye care product formulated with our proprietary, stable and pure form of hypochlorous acid (marketed as Neutrox). By replicating the antimicrobial chemicals used by white blood cells to fight infection, Avenova has proven in laboratory testing to have broad antimicrobial properties. It removes microorganisms and debris from the skin on the eyelids and lashes without burning or stinging. It also is the only commercial product clinically validated to reduce bacterial load on ocular skin surface, the build-up of which can cause the chronic eye condition blepharitis.

In November 2015, we introduced a new business strategy to focus on growing sales of Avenova in the U.S. market and to restructure our business. This new strategy allowed us to achieve our goal of reaching adjusted positive cash flow from operations (excluding working capital changes) by the end of 2016. Our current business strategy is comprised of: (1) focusing our resources on growing the commercial sales of Avenova in the U.S. eye care market, including the implementation of an innovative sales and marketing strategy to increase product margin and profitability; (2) significantly reducing expenses through the restructuring of our operations and other cost reduction measures; and (3) seeking additional sources of revenue through partnering, divesting and/or other means of monetizing non-core assets in urology, dermatology, and wound care.

We have also developed additional commercial products containing Neutrox, including our NeutroPhase for the wound care market and CelleRx for the dermatology market. We have partnerships for NeutroPhase in the U.S., as well as select overseas markets, most notably China.

In addition to our Neutrox family of products, we have synthesized and developed a second category of novel compounds also aimed at harnessing the power of white blood cell chemistry to address the global, topical anti-infective market. This second product category includes Auriclosene^®, our lead clinical-stage Aganocide^® compound, which is a patented, synthetic molecule with a broad spectrum of activity against bacteria, viruses and fungi.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. In preparing these consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, research and development costs, patent costs, stock-based compensation, income taxes and other contingencies. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

While our significant accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies), included in Part II, Item 8 of this report, we believe that the following accounting policies are most critical to fully understanding and evaluating our reported financial results.

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Allowance for Doubtful Accounts

We charge “Bad Debt” expense and set up an “Allowance for Doubtful Accounts” when management believes it unlikely a specific invoice will be collected. Management identified amounts due that are in dispute and it believes are unlikely to be collected at the end of 2016. At December 31, 2016 and 2015, management had reserved $10 thousand and $40 thousand, respectively, primarily based on specific amounts that are in dispute and are over 120 days past due.

Inventory

Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes, pumps; (2) goods in progress, which are normally unlabeled bottles; and (3) finished goods. We utilize contract manufacturers to produce our products and the cost associated with manufacturing is included in inventory. At December 31, 2016 and 2015, management had recorded an allowance for excess and obsolete inventory of $196 thousand and $45 thousand, respectively.

Inventory is stated at the lower of cost or market value determined by the first-in, first-out method.

Revenue Recognition

We sell products through a limited number of distributors, direct medical sales representatives, and via our webstore. We generally record product sales upon shipment to the final customer for our webstore sales and upon shipment from our distributor to the final customers for our major distribution partners.

We recognize product revenue when: (i) persuasive evidence that an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. Revenue from sales transactions where the customer has the right to return the product is recognized at the time of sale only if: (i) our price to the customer is substantially fixed or determinable at the date of sale, (ii) the customer has paid us, or the customer is obligated to pay us and the obligation is not contingent on resale of the product, (iii) the customer's obligation to us would not be changed in the event of theft or physical destruction or damage of the product, (iv) the customer acquiring the product for resale has economic substance apart from that provided by us, (v) we do not have significant obligations for future performance to directly bring about resale of the product by the customer, and (vi) the amount of future returns can be reasonably estimated. If these factors were to vary, the resulting change could have a material effect on our revenue recognition and on the Company’s results of operations

Product Revenue Allowances 

Product revenue is recognized net of cash consideration paid to our customers and wholesalers, for services rendered by the wholesalers in accordance with the wholesalers agreements, and include a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers' purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

Other product revenue allowances include certain prompt pay discounts and allowances offered to our customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue or as a selling expense at the later of the date at which the related revenue is recognized or the date at which the allowance is offered.  Calculating certain of these items involves estimates and judgments based on sales or invoice data, contractual terms, utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates or chargebacks. We review the adequacy of product revenue allowances on a quarterly basis. Amounts accrued for product revenue allowances are adjusted when trends or significant events indicate that adjustment is appropriate and to reflect actual experience.

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The following table summarizes the activity in the accounts related to product revenue allowances (in thousands):

	Wholesaler/ Pharmacy fees			Cash discounts			Rebate			Total
Balance at January 1, 2014	$	—		$	—		$	—		$	—
Current provision related to sales made during current period		—			—			—			—
Payments		—			—			—			—
Balance at December 31, 2014		—			—			—			—
Current provision related to sales made during current period		(28	)		(38	)		—			(66	)
Payments		28			38			—			66
Balance at December 31, 2015		—			—			—			—
Current provision related to sales made during current period		(1,350	)		(222	)		(4,379	)		(5,951	)
Payments		1,019			222			4,871			6,112
Balance at December 31, 2016	$	(331	)	$	—		$	492		$	161

Other Revenue

License and collaboration revenue is primarily generated through agreements with strategic partners for the development and commercialization of our product candidates. The terms of the agreements typically include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of certain milestones and royalties on net product sales. In accordance with authoritative guidance, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables are accounted for as a single unit of accounting and revenue is recognized over the performance obligation period.

Cost of Goods Sold

Cost of goods sold includes third party manufacturing costs, shipping costs, and other costs of goods sold. Cost of goods sold also includes any necessary allowances for excess inventory that may expire and become unsalable.

Research and Development Costs

We charge research and development costs to expense as incurred. These costs include salaries and benefits for research and development personnel, costs associated with clinical trials managed by contract research organizations, and other costs associated with research, development and regulatory activities. Research and development costs may vary depending on the type of item or service incurred, location of performance or production, or lack of availability of the item or service, and specificity required in production for certain compounds. We use external service providers to conduct clinical trials, to manufacture supplies of product candidates and to provide various other research and development-related products and services. Our research, clinical and development activities are often performed under agreements we enter into with external service providers.  We estimate and accrue the costs incurred under these agreements based on factors such as milestones achieved, patient enrollment, estimates of work performed, and historical data for similar arrangements.  As actual costs are incurred, we adjust our accruals.  Historically, our accruals have been consistent with management’s estimates, and no material adjustments to research and development expenses have been recognized.  Subsequent changes in estimates may result in a material change in our expenses, which could also materially affect our results of operations.

Stock-Based Compensation

Stock-based compensation expense is measured at the grant date for all stock-based awards to employees and directors and is recognized as expense over the requisite service period, which is generally the vesting period. Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures (Equity-Based Compensation) differ, or are expected to differ, from the previous estimate. See Note 12 of the Notes to Consolidated Financial Statements for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. For stock options granted to employees, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model.

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Stock-based compensation arrangements with non-employees are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis. For stock options granted to non-employees, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model.

Income Taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.

Common Stock Warrant Liabilities

For warrants that are issued or modified and there is a deemed possibility that we may have to settle them in cash, or for warrants we issue or modify that contain an exercise price adjustment feature that reduces the exercise price and increases the number of shares of our common stock eligible for purchase thereunder in the event we subsequently issue equity instruments at a price lower than the exercise price of the warrants, we record the fair value of the issued or modified warrants as a liability at each balance sheet date and record changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model. The Lattice model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of our judgment. For additional information regarding the Company’s outstanding warrants, see Note 10 of the Notes to Consolidated Financial Statements (Warrant Liability).

Recent Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies) included in Part II, Item 8 of this report for information on recent accounting pronouncements.

Results of Operations

Comparison of Years Ended December 31, 2016 and 2015

	Year Ended
	December 31,						Dollar			Percent
	2016			2015			Change			Change
	(in thousands)
Statement of Operations:
Sales:
Product revenue, net	$	11,617		$	4,146		$	7,471			180	%
Other revenue		280			235			45			19	%
Total sales, net		11,897			4,381			7,516			172	%
Product cost of goods sold		2,464			1,261			1,203			95	%
Gross profit		9,433			3,120			6,313			202	%
Research and development		1,371			5,728			(4,357	)		(76	)%
Sales and marketing		11,809			10,523			1,286			12	%
General and administrative		7,235			8,006			(771	)		(10	)%
Total operating expenses		20,415			24,257			(3,842	)		(16	)%
Operating Loss		(10,982	)		(21,137	)		10,155			(48	)%
Non-cash gain (loss) on changes in fair value of warrant liability		(2,099	)		2,149			(4,248	)		(198	)%
Other income (expense), net		(68	)		17			(85	)		(500	)%
Loss before provision for income taxes		(13,149	)		(18,971	)		5,822			(31	)%
Provision for income tax		(2	)		(2	)		—			—	%
Net loss	$	(13,151	)	$	(18,973	)	$	5,822			(31	)%

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Total Net Sales, Product Cost of Goods Sold and Gross Profit

Product revenue, net, increased by $7.5 million, or 180%, to $11.6 million from $4.1 million and other revenue, net, increased by $45 thousand, or 19%, to $280 thousand from $235 thousand for the year ended December 31, 2016, compared to the year ended December 31, 2015. The change in product revenue, net, was primarily the result of increased sales of Avenova in connection with the focus on product commercialization driven by unit growth and price increases. Other revenue increased primarily due to the recognition of deferred revenue upon the termination of a collaboration agreement.

Product Cost of Goods Sold increased by $1.2 million, or 95%, to $2.5 million from $1.3 million for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in product cost of goods sold was primarily the result of increased in the sales of Avenova, along with increased reserves for excess and obsolete inventory.

Gross Profit increased by $6.3 million, or 202%, to $9.4 million from $3.1 million for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in gross profit was primarily the result of increased sales of Avenova, along with the recognition of deferred revenue upon the termination of a collaboration agreement.

Research and Development 

Research and Development expenses decreased by $4.3 million, or 76%, to $1.4 million for the year ended December 31, 2016, from $5.7 million for the year ended December 31, 2015. The reduction is primarily the result of our previously-announced change in business strategy, as reflected by our reduced spending on clinical trials and our shift of capital resources from research and development to the commercialization of Avenova. Also, contributing to the decrease was a gain recognized on the sale of laboratory equipment of $232 thousand during the third quarter of 2016.

Sales and marketing

Sales and marketing expenses increased by $1.3 million, or 12%, to $11.8 million for the year ended December 31, 2016, from $10.5 million for the year ended December 31, 2015. The increase was primarily due to our previously-announced change in business strategy, as reflected by our increase in sales representative headcount and sales and marketing activities, partially offset by reduced expenses associated with our out-sourced sales team. 

General and administrative 

General and administrative expenses decreased by $0.8 million, or 10%, to $7.2 million for the year ended December 31, 2016, from $8.0 million for the year ended December 31, 2015. The decrease was primarily a result of our overall cost reduction efforts, including a reduction in staff-related expense and reductions in consulting and outside services, partially offset by the modification of the exercise price of the warrants issued in May 2015, higher stock-based compensation, and costs associated with the subleasing of our former headquarters.

Non-cash gain (loss) on changes in fair value of warrants

The adjustments to the fair value of warrants was a loss of $2.1 million and a gain of $2.1 million for the years ended December 31, 2016 and December 31, 2015, respectively.

For additional information regarding the Warrants and their valuation, please see Note 10 in the Notes to Consolidated Financial Statements included in Part I, Item 8 of this report. In the year ended December 31, 2016, non-cash loss on changes in fair value of Warrants was caused by a reduction in the exercise price of the Warrants pursuant to the price protection provision in such Warrants, along with an increase in the price of the Company’s common stock above the Warrants’ exercise prices. During the year ended December 31, 2015, we incurred a non-cash gain resulting from the re-valuation of the pre-modified July 2011 Warrants to zero.

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Other income (expense), net

Other income (expense), net, was an expense of $68 thousand compared to income of $17 thousand for the years ended December 31, 2016 and December 31, 2015, respectively. The increase in expense was a result of the interest due on the notes the Company entered into in December 2015 and January 2016 as part of our Bridge Loan, which was fully paid off on August 1, 2016. For additional information regarding the notes and the Bridge Loan, please see Note 8 in the Notes to Consolidated Financial Statements (Related Party Notes Payable) included in Part II, Item 8 of this report.

Comparison of Years Ended December 31, 2015 and 2014

	Year Ended
	December 31,						Dollar			Percent
	2015			2014			Change			Change
	(in thousands)
Statement of Operations:
Sales:
Product revenue, net	$	4,146		$	684		$	3,462			506	%
Other revenue		235			370			(135	)		(36	)%
Total sales, net		4,381			1,054			3,327			316	%
Product cost of goods sold		1,261			486			775			159	%
Gross profit		3,120			568			2,552			449	%
Research and development		5,728			9,483			(3,755	)		(40	)%
Sales and marketing		10,523			1,754			8,769			500	%
General and administrative		8,006			6,235			1,771			28	%
Total operating expenses		24,257			17,472			6,785			39	%
Operating Loss		(21,137	)		(16,904	)		(4,233	)		25	%
Non-cash gain (loss) on changes in fair value of warrant liability		2,149			1,664			485			29	%
Other income (expense), net		17			48			(31	)		(65	)%
Loss before provision for income taxes		(18,971	)		(15,192	)		(3,779	)		25	%
Provision for income tax		(2	)		(2	)		—			—	%
Net loss	$	(18,973	)	$	(15,194	)	$	(3,779	)		25	%

 Total Net Sales, Product Cost of Goods Sold and Gross Profit

Product revenue, net increased by $3.5 million, or 506%, to $4.1 million from $0.7 million and other revenue decreased by $135 thousand, or 36%, to $235 thousand from $370 thousand for the year ended December 31, 2015, compared to the year ended December 31, 2014. The change in the product revenue, net was primarily the result of increased sales of Avenova in connection with the focus on product commercialization, partially offset by a reduction in other revenue because of our de-emphasis of technology and collaboration agreements.

Product Cost of Goods Sold increased by $775 thousand, or 159%, to $1.3 million from $486 thousand for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in product cost of goods sold was primarily the result of increased in the sales of Avenova.

Gross Profit increased by $2.6 million, or 449%, to $3.1 million from $568 thousand for the year ended December 31, 2015, compared to the year ended December 31, 2014. This increase was primarily the result of increased sales of Avenova.

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Research and Development

Research and Development expenses decreased by $3.8 million, or 40%, to $5.7 million for the year ended December 31, 2015, from $9.5 million for the year ended December 31, 2014. The reduction was primarily the result of reduced spending on clinical trials and shifting responsibilities to production support from research and development. 

Sales and marketing

Sales, and marketing expenses increased by $8.8 million, or 500%, to $10.5 million for the year ended December 31, 2015, from $1.8 million for the year ended December 31, 2014. The increase was primarily due to the increase in the number of sales representatives and sales and marketing activities for the launch of Avenova, which began in August of 2014.

General and administrative

General and administrative expenses increased by $1.8 million, or 28%, to $8.0 million for the year ended December 31, 2015, from $6.2 million for the year ended December 31, 2014. The increase was primarily due to the increase in accounting, consulting and legal expenses, wages and stock based compensation.

Non-cash gain (loss) on changes in fair value of warrants

The adjustments to the fair value of warrants were gains of $2.1 million, and $1.7 million for the years ended December 31, 2015, and December 31, 2014, respectively.

The non-cash gain on changes in the fair value of warrants relates primarily to warrants issued or modified as part of the October 2015 financing. The change in fair value was primarily the result of two factors. First, the October 2015 financing included the following elements that increased the fair value of the warrant liability: the term of the warrants issued in July 2011 was extended and the exercise price adjusted to the then market price, the terms of the warrants issued in March 2015 were similarly adjusted, which caused the March 2015 warrants to be reclassified from equity to a liability, and additional warrants were issued as part of the October 2015 financing. The October 2015 warrants were classified as a liability when they were issued. Second, the warrants issued in July 2011, March 2015 and October 2015 were all valued when they were issued and re-measured as of December 31, 2015, the result being a reduction in the warrant liability of $2,149 thousand. Please see Note 10 in the Notes to Consolidated Financial Statements (Warrant Liability) in Part II, Item 8 of this report for a more complete explanation.

Other income (expense), net

Other income, net, was $17 thousand and $48 thousand for the years ended December 31, 2015, and December 31, 2014, respectively. The decrease was primarily due to a general reduction in cash balance. The change is primarily the result of converting investments in securities to operating cash during 2015, instead of being invested in accounts that generated returns.

Cash Used in Operating Activities

For the year ended December 31, 2016, cash used in operating activities was $12.1 million compared to $18.6 million for the year ended December 31, 2015. The decrease was primarily due to increased sales of Avenova and a decrease in operating expenses, partially offset by an increase in cost of sales. 

For the year ended December 31, 2015, cash used in operating activities was $18.6 million compared to $15.1 million for the year ended December 31, 2014. The increase in 2015 was due to increased spending on sales and marketing activities in the amount of $8.8 million, partially offset by a decrease in spending on clinical activity of $1.8 million.

Cash Provided By or Used In Investing Activities

For the year ended December 31, 2016 and 2015, cash used in investing activities was for the purchase of property and equipment of $0.2 million and $0.1 million, respectively. For the year ended December 31, 2014, cash provided by investing activities of $2.6 million was primarily attributable to the net effects of purchases, sales and maturities of short-term investments.

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Cash Provided by Financing Activities

Net cash provided by financing activities of $19.4 million for the year ended December 31, 2016 was primarily attributable to the net sale of $13.6 million of our common stock in our financings in February, May and August 2016, and Warrants exercised in a net amount of $7.4 million in August, September, October, and November 2016, and the borrowing of $1.4 million in connection with the final tranche of the Bridge Loan, fully offset by the full repayment of $3.0 million of our Bridge Loan.

Net cash provided by financing activities of $15.6 million for the year ended December 31, 2015, was primarily attributable to proceeds from the sale of common stock and Warrants in March, May and October, the sale of our common stock under our ATM agreement and the proceeds from the Bridge Loan.

Net cash provided by financing activities of $7.4 million for the year ended December 31, 2014, was primarily attributable to proceeds from the sale of our common stock under our ATM agreement and the sale of common stock and warrants in our March financing. 

Quarterly Results of Operations (unaudited)

The following table presents unaudited quarterly results of operations for the eight most recent quarters ending with the quarter ended December 31, 2016. This information has been derived from our unaudited consolidated financial statements and has been prepared by us on a basis consistent with our audited annual consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the information for the periods presented.

	Quarter Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2016			2016			2016			2016			2015			2015			2015			2015
	(in thousands, except per share data)
Statements of Operations Data:
Sales:
Product Revenue, net	$	4,046		$	3,262		$	2,654		$	1,655		$	1,587		$	1,136		$	931		$	492
Other Revenue, net		31			176			9			64			48			64			77			46
Total Sales, net		4,077			3,438			2,663			1,719			1,635			1,200			1,008			538
Product Cost of Goods Sold		808			566			479			611			591			269			253			148
Gross Profit		3,269			2,872			2,184			1,108			1,044			931			755			390
Operating expenses:
Research and development		156			4			278			933			1,225			1,563			1,357			1,583
Sales and marketing		3,149			2,663			2,853			3,144			3,263			3,035			2,311			1,914
General and administrative		1,994			2,266			1,293			1,682			2,742			1715			1,975			1,574
Total operating expenses		5,299			4,933			4,424			5,759			7,230			6,313			5,643			5,071
Operating loss		(2,030	)		(2,061	)		(2,240	)		(4,651	)		(6,186	)		(5,382	)		(4,888	)		(4,681	)
Non-cash gain (loss) on change in fair value of warrant liability		381			(1,671	)		(424	)		(385	)		1,976			139			—			34
Other income (expense), net		1			(4	)		(24	)		(41	)		6			1			3			7
Loss before provision for income taxes		(1,648	)		(3,736	)		(2,688	)		(5,077	)		(4,204	)		(5,242	)		(4,885	)		(4,640	)
Provision for income tax		—			—			(2	)		—			—			—			(2	)		—
Net loss	$	(1,648	)	$	(3,736	)	$	(2,690	)	$	(5,077	)	$	(4,204	)	$	(5,242	)	$	(4,887	)	$	(4,640	)
Net loss per share:
Basic	$	(0.11	)	$	(0.34	)	$	(0.36	)	$	(1.24	)	$	(1.26	)	$	(1.76	)	$	(1.84	)	$	(2.13	)
Diluted	$	(0.13	)	$	(0.34	)	$	(0.36	)	$	(1.24	)	$	(1.26	)	$	(1.76	)	$	(1.84	)	$	(2.13	)
Shares used in computing net loss per share:
Basic (after effect of 1-for-25 reverse stock split)		15,148			10,913			7,407			4,086			3,337			2,985			2,653			2,175
Diluted (after effect of 1-for-25 reverse stock split)		15,459			10,913			7,407			4,086			3,337			2,985			2,653			2,175

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Net Operating Losses and Tax Credit Carryforwards

As of December 31, 2016, we had NOL carryforwards for federal and state income tax purposes of $90.2 million and $78.2 million, respectively. If not utilized, the federal and state NOL carryforwards will begin expiring at various dates between 2024 and 2036. As of December 31, 2016, we also had tax credit carryforwards for federal income tax purposes of $1.3 million and $0.3 million for state tax purposes. If not utilized, the federal tax credits will begin expiring in 2031. The state tax credits have an indefinite carryover period.

Current federal and California tax laws include substantial restrictions on the utilization of NOL carryforwards in the event of an ownership change of a corporation. Accordingly, our ability to utilize NOL carryforwards may be limited as a result of such ownership changes and result in expiration before utilization.

Inflation and Seasonality

We do not believe that inflation has had a material impact on our business and operating results during the periods presented, and we do not expect it to have a material impact in the near future, although there can be no assurances that our business will not be affected by inflation in the future.

We do not believe our business is subject to seasonality or any other cyclical trends.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of December 31, 2016,

Contractual Obligations

Our contractual cash commitments as of December 31, 2016, were as follows (in thousands):

Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Operating leases	$	4,725	$	987	$	2,199	$	1,464	$	75
	$	4,725	$	987	$	2,199	$	1,464	$	75

Our commitments as of December 31, 2016, consist of two operating leases: the Lease and the lease for Emery Station. The total commitment for the Lease as of December 31, 2016 was $2.1 million due over the lease term, compared to zero as of December 31, 2015.

The total commitment of the Emery Station lease as of December 31, 2016 was $2.6 million due over such lease term, compared to $3.3 million as of December 31, 2015. On July 11, 2016, we entered into a Sublease Agreement to sublease our former corporate headquarters. Sublease rental reimbursement is not deducted from the above table. We anticipate collecting $709 thousand, $609 thousand, $690 thousand, and $576 thousand in the years ending December 31, 2017, 2018, 2019, and 2020, respectively, under the Sublease for the lease of Emery Station. 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk consists principally of interest rate risk on our cash, cash equivalents, and short-term investments. Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in interest rates, particularly because our current liquid assets at December 31, 2016 are held in cash and cash equivalents.

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Our investment policy restricts our investments to high-quality investments and limits the amounts invested with any one issuer, industry, or geographic area. The goals of our investment policy are as follows: preservation of capital, assurance of liquidity needs, best available return on invested capital, and minimization of capital taxation. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, in accordance with our investment policy, we maintain our cash and cash equivalents in short-term marketable securities, including money market mutual funds, Treasury bills, Treasury notes, certificates of deposit, commercial paper, and corporate and municipal bonds. The risk associated with fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of our investment portfolio, we believe we have minimal interest rate risk arising from our investments. As of December 31, 2016 and 2015, a 10% change in interest rates would have had an immaterial effect on the value of our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We do not hold any instruments for trading purposes.

With most of our focus on Avenova in the domestic U.S. market, we have not had any material exposure to foreign currency rate fluctuations.

25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this Item 8 are set forth below. Our quarterly financial information is set forth in Item 7 of this report and is hereby incorporated into this Item 8 by reference.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
	Page
Report of Independent Registered Public Accounting Firm	27
Consolidated Balance Sheets as of December 31, 2016, and 2015	28
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2016, 2015 and 2014	29
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2016, 2015 and 2014	30
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014	31
Notes to Consolidated Financial Statements	33

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

NovaBay Pharmaceuticals, Inc.

 We have audited the accompanying consolidated balance sheets of NovaBay Pharmaceuticals, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the consolidated financial position of NovaBay Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ OUM & CO. LLP

San Francisco, California

March 23,2017

27

NOVABAY PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31,
	2016			2015
ASSETS
Current assets:
Cash and cash equivalents	$	9,512		$	2,385
Accounts receivable, net of allowance for doubtful accounts ($10 and $40 at December 31 2016, and December 31, 2015, respectively)		2,120			536
Inventory, net of allowance for excess and obsolete inventory ($196 and $45 at December 31, 2016 and 2015, respectively)		873			1,345
Prepaid expenses and other current assets		1,966			261
Total current assets		14,471			4,527
Property and equipment, net		371			395
Other assets		539			155
TOTAL ASSETS	$	15,381		$	5,077
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Current liabilities:
Accounts payable	$	455		$	2,483
Accrued liabilities		1,801			1,980
Deferred revenue		2,067			170
Total current liabilities		4,323			4,633
Deferred revenue - non-current		1,986			2,248
Deferred rent		327			189
Notes payable, related party		—			1,655
Warrant liability		1,446			1,450
Other liabilities		198			—
Total liabilities		8,280			10,175
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Preferred stock: 5,000 shares authorized; none outstanding at December 31, 2016 and 2015		—			—
Common stock, $0.01 par value; 240,000 shares authorized 15,269 and 3,486 shares issued and outstanding at December 31, 2016 and 2015, respectively		153			35
Additional paid-in capital		110,619			85,387
Accumulated other comprehensive loss		—			—
Accumulated deficit		(103,671	)		(90,520	)
Total stockholders' equity (deficit)		7,101			(5,098	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	15,381		$	5,077

The accompanying notes are an integral part of these consolidated financial statements

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NOVABAY PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands except per share data)

	Year Ended December 31,
	2016			2015			2014
Sales:
Product Revenue, net	$	11,617		$	4,146		$	684
Other Revenue, net		280			235			370
Total Sales, net		11,897			4,381			1,054
Product Cost of Goods Sold		2,464			1,261			486
Gross Profit		9,433			3,120			568
Research and development		1,371			5,728			9,483
Sales and marketing		11,809			10,523			1,754
General and administrative		7,235			8,006			6,235
Total Operating Expenses		20,415			24,257			17,472
Operating Loss		(10,982	)		(21,137	)		(16,904	)
Non-cash gain (loss) on changes in fair value of warrant liability		(2,099	)		2,149			1,664
Other income (expense), net		(68	)		17			48
Loss before provision for income taxes		(13,149	)		(18,971	)		(15,192	)
Provision for income tax		(2	)		(2	)		(2	)
Net loss		(13,151	)		(18,973	)		(15,194	)
Change in Unrealized gains on available for sale securities		—			—			15
Comprehensive loss	$	(13,151	)	$	(18,973	)	$	(15,179	)
Loss per share (basic and diluted)	$	(1.40	)	$	(6.82	)	$	(7.65	)
Basic and Diluted Shares used in loss per share calculation		9,408			2,784			1,985

The accompanying notes are an integral part of these consolidated financial statements

29

NOVABAY PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In			Comprehensive			Accumulated			Stockholders'
	Shares			Amount		Capital			Loss			Deficit			Equity (Deficit)
Balance at December 31, 2013		1,785		$	18	$	64,866		$	(15	)	$	(56,353	)	$	8,516
Net loss		—			—		—			—			(15,194	)		(15,194	)
Change in unrealized gains (losses) on investments		—			—		—			15			—			15
Issuance of common stock in connection with shelf offering, net of offering costs		275			3		7,122			—			—			7,125
Issuance of stock to Pioneer		—			—		205			—			—			205
Issuance of stock for option exercises		2			—		34			—			—			34
Issuance of stock to consultants for services		2			—		28			—			—			28
Employee bonus paid in common stock		1			—		77			—			—			77
Stock-based compensation expense related to employee and director stock options		—			—		853			—			—			853
Stock-based compensation expense related to non-employee stock options		—			—		189			—			—			189
Vesting of employee restricted stock awards		1			—		—			—			—			—
Balance at December 31, 2014		2,066			21		73,374			—			(71,547	)		1,848
Net loss		—			—		—			—			(18,973	)		(18,973	)
Issuance of common stock in connection with shelf offering, net of offering costs		85			1		1,176			—			—			1,177
Issuance of stock and warrants, net of offering costs		1,328			13		11,505			—			—			11,518
Equity transferred to warrant liability		—			—		(2,175	)		—			—			(2,175	)
Issuance of stock to consultants for services		4			—		63			—			—			63
Employee bonus paid in common stock		3			—		62			—			—			62
Stock-based compensation expense related to employee and director stock options		—			—		1,194			—			—			1,194
Stock-based compensation expense related to non-employee stock options		—			—		188			—			—			188
Balance at December 31, 2015		3,486			35		85,387			—			(90,520	)		(5,098	)
Net loss		—			—		—			—			(13,151	)		(13,151	)
Issuance of common stock in connection with shelf offering, net of offering costs		7,692			77		13,571			—			—			13,648
Issuance of stock and warrants, net of offering costs		3,977			40		7,389			—			—			7,429
Fair market value of warrants transferred to equity upon exercise		—			—		2,103			—			—			2,103
Warrant modification		—			—		270			—			—			270
Issuance of stock to consultants for services		2			—		8			—			—			8
Vesting of employee restricted stock awards		73			1		173			—			—			174
Vesting of non-employee restricted stock awards		41			—		133			—			—			133
Shares retired as a result of the 1 for 25 reverse stock split		(2	)		—		—			—			—			—
Stock-based compensation expense related to employee and director stock options		—			—		1,316			—			—			1,316
Stock-based compensation expense related to non-employee stock options		—			—		269			—			—			269
Balance at December 31, 2016		15,269		$	153	$	110,619		$	—		$	(103,671	)	$	7,101

The accompanying notes are an integral part of these consolidated financial statements.

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NOVABAY PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31.
	2016			2015			2014
Cash flows from operating activities:
Net loss	$	(13,151	)	$	(18,973	)	$	(15,194	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		114			164			232
Net realized loss on sales of short-term investments		—			—			40
Gain on sale and disposal of property and equipment		(219	)		(1	)		(54	)
Stock-based compensation expense for options and stock issued to employees and directors		1,316			1,194			853
Stock-based compensation expense for options and stock issued to non-employees		129			188			189
Issuance of RSUs to employees		173			—			—
Issuance of RSUs to non-employees		133			—			—
Warrant modification		270			—			—
Note receivable impairment		91			—			—
Non-cash (gain) loss on change in fair value of warrant liability		2,099			(2,149	)		(1,664	)
Property and equipment impairment		70			—			—
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(1,585	)		(299	)		555
Increase (decrease) in inventory		472			(751	)		(451	)
(Increase) decrease in prepaid expenses and other assets		(1,470	)		402			102
Increase in other assets long-term		(474	)		—			—
Increase (decrease) in accounts payable and accrued liabilities		(2,162	)		1,655			(252	)
Increase in deferred rent		327			17			36
Increase in accrued taxes		87			—			—
Increase (decrease) in deferred revenue		1,447			(6	)		553
Increase in other liabilities long-term		198			—			—
Net cash used in operating activities		(12,135	)		(18,559	)		(15,055	)
Cash flows from investing activities:
Purchases of property and equipment		(160	)		(123	)		(68	)
Proceeds from disposal of property and equipment		—			37			128
Purchases of short-term investments		—			—			(4,012	)
Proceeds from maturities and sales of short-term investments		—			—			6,550
Net cash provided (used) by investing activities		(160	)		(86	)		2,598
Cash flows from financing activities:
Proceeds from common stock issuances, net		13,648			11,519			227
Proceeds from exercise of options and warrants		7,429			1,250			34
Proceeds from borrowings		1,365			1,655			—
Repayment of borrowings		(3,020	)		—			—
Proceeds from shelf offering, net		—			1,177			7,125
Net cash provided by financing activities		19,422			15,601			7,386
Net increase (decrease) in cash and cash equivalents		7,127			(3,044	)		(5,071	)
Cash and cash equivalents, beginning of period		2,385			5,429			10,500
Cash and cash equivalents, end of period	$	9,512		$	2,385		$	5,429

The accompanying notes are an integral part of these consolidated financial statements.

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NOVABAY PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

(in thousands)

	Year Ended December 31.
	2016		2015			2014
Supplemental disclosure of non-cash information:
Bonus paid in stock	$	—	$	62		$	54
Stock issued to consultants for services	$	8	$	63		$	7
Property and equipment purchases, included in accounts payable and accrued liabilities	$	60	$	—		$	—
Cash paid for interest	$	51	$	—		$	—
Options exercised	$	—	$	(4	)	$	—
Warrant liability transferred to (from) equity	$	2,103	$	(2,175	)	$	—
Exchange of equipment for services	$	279	$	—		$	—
Severance paid in RSU to non-employees	$	140	$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

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NOVABAY PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION

NovaBay Pharmaceuticals, Inc. (the “Company”) is a pharmaceutical company focused on commercializing prescription Avenova® daily lid and lash hygiene in the domestic eye care market.

The Company was incorporated under the laws of the State of California on January 19, 2000, as NovaCal Pharmaceuticals, Inc. It had no operations until July 1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007, it changed its name from NovaCal Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In August 2007, it formed two subsidiaries––NovaBay Pharmaceuticals Canada, Inc., a wholly-owned subsidiary incorporated under the laws of British Columbia (Canada), which was formed to conduct research and development in Canada and was dissolved in July 2012, and DermaBay, Inc., a wholly-owned U.S. subsidiary, which may explore and pursue dermatological opportunities (“DermaBay”). In June 2010, it changed the state in which it is incorporated (the “Reincorporation”), and is now incorporated under the laws of the State of Delaware. All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation, and to the Delaware corporation on and after the date of the Reincorporation. Historically, the Company operated as four business segments. At the direction of its Board of Directors, the Company is focused primarily on commercializing prescription Avenova for managing hygiene of the eyelids and lashes in the United States and is now managed as a single business and not four segments.

Effective December 11, 2015, the Company effected a 1-for-25 reverse split of its outstanding common stock (“Reverse Stock Split”) (See Note 11). 

Liquidity

With the funds available at December 31, 2016, the Company believes these resources will be sufficient to fund its operations into 2018. The Company has sustained operating losses for the majority of its corporate history and expects that its 2017 expenses will exceed its 2017 revenues, as we continue to re-invest in our Avenova commercialization efforts. The Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company’s planned operations raise doubt about its ability to continue as a going concern. The Company’s liquidity needs will be largely determined by the success of operations in regards to the commercialization of Avenova. The Company’s plans to alleviate the doubt of its going concern, which are being implemented to mitigate these conditions, primarily include its ability to control the timing and spending on its sales and marketing programs and raising additional funds through equity financings. The Company also may consider other plans to fund operations including: (1) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; (2) raising additional capital through debt financings or from other sources; (3) reducing spending on one or more its sales and marketing programs; and/or (4) restructuring operations to change its overhead structure. The Company may issue securities, including common stock and warrants through private placement transactions or registered public offerings, which would require the filing of a Form S-1 or S-3 registration statement with the Securities and Exchange Commission (“SEC”). The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of the commercialization of Avenova. The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to its ability to continue as a going concern.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are expressed in U.S. dollars.

33

Reclassifications

Prior period amounts in the accompanying consolidated balance sheets have been reclassified to conform to current period presentation. The reclassifications did not change total assets, total liabilities, or total stockholders’ equity. Additionally, prior period amounts in the accompanying consolidated statement of operations and comprehensive loss and have been reclassified to conform to current period presentation. The reclassifications did not change the net loss or loss per share

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, DermaBay, which was dissolved by the Company in April 2016. All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates include useful lives for property and equipment and related depreciation calculations, estimated amortization period for payments received from product development and license agreements as they relate to revenue recognition, assumptions for valuing options and warrants, and income taxes. Actual results could differ from those estimates.

Cash and Cash Equivalents and Short-Term Investments

The Company considers all highly-liquid instruments with a stated maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of December 31, 2016, and December 31, 2015, the Company’s cash and cash equivalents were held in three highly-rated, major financial institutions in the United States.

The Company classifies all highly-liquid investments with a stated maturity of greater than three months at the date of purchase as short-term investments. Short-term investments generally consist of municipal and corporate debt securities. The Company has classified its short-term investments as available-for-sale. The Company does not intend to hold securities with stated maturities greater than twelve months until maturity. These securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive loss until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. A decline in the market value below cost of any available-for-sale security that is determined to be other-than-temporary results in a revaluation of its carrying amount to fair value and an impairment charge to earnings, resulting in a new cost basis for the security. No such impairment charges were recorded for the periods presented. The interest income and realized gains and losses are included in other expense, net, within the consolidated statements of operations and comprehensive loss. Interest income is recognized when earned. As of December 31, 2016 and December 31, 2015, the Company had no short-term investments.

Concentrations of Credit Risk, Major Partners and Customers, and Suppliers

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits of cash and cash equivalents with three highly-rated, major financial institutions in the United States.

Deposits in these banks may exceed the amount of federal insurance provided on such deposits. The Company does not believe it is exposed to significant credit risk due to the financial position of the financial institutions in which these deposits are held.

During the years ended December 31, 2016 and 2015 revenues were derived primarily from sales of Avenova directly to doctors through the Company’s webstore and to three major distribution partners. During the year ended December 31, 2014 revenues were derived primarily from one collaboration partner, service revenues and sales of NeutroPhase.

34

As of December 31, 2016, December 31, 2015 and December 31, 2014 revenues from our major distribution or collaboration partners greater than 10% are as follows:

	Year Ended December 31,
Major distribution or collaboration partner	2016			2015		2014
Distributer A		20	%		*		*
Distributer B		22	%		*		*
Distributer C		16	%		*		*
Collaborator D		*			*		15	%

*Not greater than 10%

As of December 31, 2016, and December 31, 2015 accounts receivable from our major distribution or collaboration partners greater than 10% are as follows:

	Year Ended December 31,
Major distribution or collaboration partner	2016			2015
Distributer A		22	%		36	%
Distributer B		24	%		11	%
Distributer C		31	%		*

*Not greater than 10%

The Company relies on two third party sole source manufacturers to produce its finished goods. The Company does not have any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods. Third party manufacturers may not be able to meet the Company’s needs with respect to timing, quantity or quality.

Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. Our warrant liability is carried at fair value.

The Company measures the fair value of financial assets and liabilities based on U.S. GAAP guidance, which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements.

Under U.S. GAAP, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is also established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets or liabilities;

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable;

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

Allowance for Doubtful Accounts

The Company charges bad debt expense and records an allowance for doubtful accounts when management believes it unlikely a specific invoice will be collected. Management identifies amounts due that are in dispute and it believes are unlikely to be collected at the end of 2016. At December 31, 2016 and December 31, 2015, management had reserved $10 thousand and $40 thousand, respectively, primarily based on specific amounts that are in dispute and or are over 120 days past due.

Inventory

Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes, pumps; (2) goods in progress, which are normally unlabeled bottles; and (3) finished goods. We utilize contract manufacturers to produce our products and the cost associated with manufacturing is included in inventory. At December 31, 2016 and 2015, management had recorded an allowance for excess and obsolete inventory of $196 thousand and $45 thousand, respectively.

35

Inventory is stated at the lower of cost or market value determined by the first-in, first-out method.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three years for computer equipment and software and seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of seven years or the lease term.

The costs of normal maintenance, repairs, and minor replacements are charged to operations when incurred.

In September 2016, the Company sub-leased its former headquarters and determined that its leasehold improvements were impaired. This resulted in a $66 thousand impairment charge recorded to general and administrative expense for the third quarter of 2016, and is reflected in the results for the year ended December 31, 2016. 

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with U.S. GAAP, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use are present. Management periodically evaluates the carrying value of long-lived assets. During the first quarter of fiscal year 2016, the Company impaired a note receivable which was deemed to no longer be collectable, as the originator of the loan is not in business and the collateral held against the loan did not possess value in an amount sufficient to satisfy the loan. As a result, a $91 thousand impairment charge was recorded to research and development expense for the first quarter of fiscal year 2016, and is reflected in the results for the year ended December 31, 2016. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the statements of operations.

Comprehensive Income (Loss)

ASC 220, Comprehensive Income, requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported. The Company reports unrealized gains and losses on its available-for-sale securities as other comprehensive income (loss).

Revenue Recognition

The Company sells products through a limited number of distributors and via its webstore. The Company generally records product sales upon shipment to the final customer for its webstore sales and upon shipment from its distributor to the final customers for its major distribution partners.

The Company recognizes product revenue when: (i) persuasive evidence that a sale arrangement exists; (ii) delivery has occurred and title has passed; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue from sales transactions where the customer has the right to return the product is recognized at the time of sale only if: (i) the Company’s price to the customer is substantially fixed or determinable at the date of sale; (ii) the customer has paid the Company, or the customer is obligated to pay the Company and the obligation is not contingent on resale of the product; (iii) the customer's obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product; (iv) the customer acquiring the product for resale has economic substance apart from that provided by the Company; (v) the Company does not have significant obligations for future performance to directly bring about resale of the product by the customer; and (vi) the amount of future returns can be reasonably estimated. If these factors were to vary, the resulting change could have a material effect on our revenue recognition and on the Company’s results of operations

Product Revenue Allowances 

Product revenue is recognized, net of cash consideration paid to the Company’s customers and wholesalers, for services rendered by wholesalers in accordance with such wholesalers’ agreements and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers' purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

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Other product revenue allowances include certain prompt pay discounts and allowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue or as a selling expense at the later of the date at which the related revenue is recognized or the date at which the allowance is offered.

Other Revenue

License and collaboration revenue is primarily generated through agreements with strategic partners for the development and commercialization of the Company’s product candidates. The terms of the agreements typically include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of certain milestones and royalties on net product sales. In accordance with authoritative guidance, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables are accounted for as a single unit of accounting and revenue is recognized over the performance obligation period. Revenue is recognized when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. If these factors were to vary the resulting change could have a material effect on our revenue recognition and on our results of operations.

Cost of Goods Sold

Cost of goods sold includes third party manufacturing costs, shipping costs, and other costs of goods sold. Cost of goods sold also includes any necessary allowances for excess inventory that may expire and become unsalable.

Research and Development Costs

The Company charges research and development costs to expense as incurred. These costs include salaries and benefits for research and development personnel, costs associated with clinical trials managed by contract research organizations, and other costs associated with research, development and regulatory activities. Research and development costs may vary depending on the type of item or service incurred, location of performance or production, or lack of availability of the item or service, and specificity required in production for certain compounds. The Company uses external service providers to conduct clinical trials, to manufacture supplies of product candidates and to provide various other research and development-related products and services. The Company’s research, clinical and development activities are often performed under agreements it enters into with external service providers.  The Company estimates and accrues the costs incurred under these agreements based on factors such as milestones achieved, patient enrollment, estimates of work performed, and historical data for similar arrangements.  As actual costs are incurred, the Company adjusts its accruals.  Historically, the Company’s accruals have been consistent with management’s estimates, and no material adjustments to research and development expenses have been recognized.  Subsequent changes in estimates may result in a material change in the Company’s expenses, which could also materially affect its results of operations.

Patent Costs

Patent costs, including legal expenses, are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of Accounting Standards Updates (“ASU”) No. 2014-12, Compensation-Stock Compensation (Topic 718). Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date for all stock-based awards to employees and directors and is recognized as expense over the requisite service period, which is generally the vesting period. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model. See Note 12 for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. The Company accounts for restricted stock unit awards issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.

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Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.

Common Stock Warrant Liabilities

For warrants that are newly issued or modified and there is a deemed possibility that the Company may have to settle them in cash, or for warrants it issues or modifies that contain an exercise price adjustment feature, the Company records the fair value of the issued or modified warrants as a liability at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model. The Lattice model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of our judgment. 

Net Income (Loss) per Share

The Company computes net income (loss) per share by presenting both basic and diluted earnings (loss) per share (“EPS”).

Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing, diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods because their effect would be anti-dilutive. During years ended December 31, 2016, 2015 and 2014, there is no difference between basic and diluted net loss per share. The following table sets forth the reconciliation between basic EPS and diluted EPS, after giving effect to the reverse stock split.

	Year Ended December 31,
(in thousands, except per share data)	2016			2015			2014
Net loss	$	(13,151	)	$	(18,973	)	$	(15,194	)
Basic shares		9,408			2,784			1,985
Add: shares issued upon assumed exercise of stock options and warrants		—			—			—
Diluted shares		9,408			2,784			1,985
Basic EPS	$	(1.40	)	$	(6.82	)	$	(7.65	)
Diluted EPS	$	(1.40	)	$	(6.82	)	$	(7.65	)

The following outstanding stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Stock options		1,489		388		323
Stock warrants		565		1,458		197

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Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015 and March, April, May and December 2016, the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each performance obligation. ASU 2014-09 as amended is effective for interim and annual reporting periods beginning after December 15, 2017 but permitted the Company to adopt the standard early, but not before the original effective date of December 15, 2016. The Company plans to adopt the new standard effective January 1, 2018 with a modified retrospective transition applying the new guidance to the most current period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most current period presented.

While the Company is still in the process of assessing the potential impact of this new standard on its consolidated financial statements, the Company has identified that transactions which under current guidance are recognized upon shipment from its distributor to the final customers for its major distribution partners will be recognized upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to. As a result, the Company will record contract liabilities for the invoiced amounts that are estimated to be subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, chargebacks, and product returns. The constraint on variable consideration for product returns will be a new estimation resulting from the earlier recognition under the new guidance.

The Company has also identified that license and collaboration revenue that is currently accounted for as a combined unit of accounting because products or services are not separable, may be identified as separate performance obligations that are capable of being distinct under the new guidance. As a result, the transaction price under these arrangements, including upfront fees and milestone payments, may be allocated differently to performance obligations, which may each be recognized at earlier points in time or with a different pattern of performance over time.

The Company is still evaluating its major distribution agreements and its license and collaboration agreements and assessing the impact of adoption of the new standard to its consolidated financial statements. The company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that may impact its current conclusions, and will expand its analysis to include any new or modified revenue arrangements prior to adoption. The Company expects to complete the efforts by the fourth quarter of 2017. 

In August 2014, FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosure if substantial doubt exists. The new standard is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The Company adopted ASU 2014-15 and for adoption impact see Note1 to the financial statements under “liquidity”

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU No. 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for the Company in the first quarter of fiscal year 2017, with early adoption permitted. The Company is still evaluating, but does not believe the implementation of this guidance will result in a material impact to its consolidated financial statements.

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This guidance will be effective for the Company beginning in the first quarter of fiscal year 2018. The Company is evaluating the effects of the adoption of this guidance to its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Leases (Topic 840). ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the first quarter of fiscal year 2019. The Company is evaluating the effects of the adoption of this guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective beginning in the first quarter of fiscal year 2017 and early adoption is permitted in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes such interim period. The Company is still evaluating, but does not believe the implementation of this guidance will result in a material impact to its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), which addresses eight specific issues regarding the treatment of cash flow. This update is effective for the Company for its fiscal year 2018. The Company is currently evaluating the effects of the adoption of ASU 2016-15 to its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), that will require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This update is effective for the Company for its fiscal year 2018. The Company is currently evaluating the effects of the adoption of ASU 2016-18 to its consolidated financial statements.

NOTE 3. FAIR VALUE MEASUREMENTS

The Company measures the fair value of financial assets and liabilities based on authoritative guidance that defines fair value, establishes a framework consisting of three levels for measuring fair value, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be receive for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The Company’s cash equivalents and investments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of investments that are generally classified within Level 1 of the fair value hierarchy include money market securities and certificates of deposits. The types of investments that are generally classified within Level 2 of the fair value hierarchy include corporate securities and U.S. government securities.

The Company’s warrant liability is classified within level 3 of the fair value hierarchy because the value is calculated using significant judgment based on our own assumptions in the valuation of this liability.

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The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:

	Fair Value Measurements Using
(in thousands)	Balance at December 31, 2016		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	100	$	100	$	—	$	—
Restricted cash held as a certificate of deposit		324		324		—		—
Deposit held as a certificate of deposit		150		150		—		—
Total assets	$	574	$	574	$	—	$	—
Liabilities
Warrant liability	$	1,446	$	—	$	—	$	1,446
Total liabilities	$	1,446	$	—	$	—	$	1,446

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2015:

	Fair Value Measurements Using
(in thousands)	Balance at December 31, 2015		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	2,385	$	2,385	$	—	$	—
Total assets	$	2,385	$	2,385	$	—	$	—
Liabilities
Warrant liability	$	1,450	$	—	$	—	$	1,450
Total liabilities	$	1,450	$	—	$	—	$	1,450

For the year ended December 31, 2016, as a result of the fair value adjustment of the warrant liability, the Company recorded a non-cash loss on a change in the fair value of $2.1 million in its consolidated statements of operations and comprehensive loss.  See Note 10 for further discussion on the calculation of the fair value of the warrant liability.

(in thousands)	2016			2015
Fair value of warrant liability at January 1	$	1,450		$	173
Fair value of warrants issued		—			1,251
Fair value of warrants transferred (to) from equity upon exercise		(2,103	)		2,175
Increase (decrease) in fair value on exercise date and December 31		2,099			(2,149	)
Fair value of warrant liability at December 31	$	1,446		$	1,450

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NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

(in thousands)	December 31, 2016		December 31, 2015
Prepaid sales rebates	$	658	$	—
Prepaid outsourced sales team		606		—
Rent receivable		165		—
Prepaid research and development services		123		—
Prepaid rent		120		—
Other		294		261
Total prepaid expenses and other current assets	$	1,966	$	261

NOTE 5. INVENTORY

Inventory consisted of the following:

(in thousands)	December 31, 2016			December 31, 2015
Raw materials and supplies	$	514		$	660
Goods in process		—			248
Finished goods		555			482
Less: Reserve for excess and obsolete inventory		(196	)		(45	)
Total inventory, net	$	873		$	1,345

NOTE 6. PROPERTY AND EQUIPMENT 

Property and equipment consisted of the following:

(in thousands)	December 31, 2016			December 31, 2015
Office and laboratory equipment	$	24		$	1,528
Furniture and fixtures		153			169
Computer equipment and software		170			122
Production equipment		105			105
Leasehold improvements		68			173
Total property and equipment, at cost		520			2,097
Less: accumulated depreciation and amortization		(149	)		(1,702	)
Total property and equipment, net	$	371		$	395

In the quarter ended September 30, 2016, the Company sub-leased its prior headquarters and determined that its leasehold improvements were impaired. This resulted in a $66 thousand impairment charge recorded to general and administrative expense in the consolidate statement of operation and comprehensive loss for the year ended December 31, 2016.

In the quarter ended September 30, 2016, the Company transferred title to a significant portion of its lab equipment in exchange for research and development services. As a result, the Company recognized a $232 thousand gain on the sales of these assets, which was recorded to research and development expense in the consolidate statement of operation and comprehensive loss for the year ended December 31, 2016.

In the quarter ended December 31 2016, the Company disposed of damaged, unusable and full depreciated property and equipment. As a result, the Company recognized a $13 thousand loss on the disposal of these assets, and a $4 thousand impairment charge, which were recorded to general and administrative expense in the consolidate statement of operation and comprehensive loss for the year ended December 31, 2016.

Depreciation and amortization expense was $114 thousand, $164 thousand, $232 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.

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NOTE 7. ACCRUED LIABILITIES 

Accrued liabilities consisted of the following:

(in thousands)	December 31, 2016		December 31, 2015
Research and development	$	2	$	394
Employee payroll and benefits		763		414
Severance pay		250		790
Sales rebates		166		150
Outsourced sales team		333		—
Inventory		75		—
Other		212		232
Total accrued liabilities	$	1,801	$	1,980

NOTE 8. RELATED PARTY NOTES PAYABLE

Beginning on December 30, 2015, the Company entered into a series of agreements pursuant to a loan (the “Loan”) facilitated by China Kington Asset Management Co. Ltd. (“China Kington”). In connection with the Loan, the Company issued five (5) promissory notes (the “Notes”) payable to Mr. Mark Sieczkarek, the Gail J. Maderis Revocable Trust, Dr. T. Alex McPherson, Mr. Jian Ping Fu, and Pioneer Pharma (Singapore) Pte. Ltd. (“Pioneer Singapore”) (collectively, the “Lenders”), loaning the Company an aggregate of $3.0 million. Specifically, Mr. Sieczkarek, Chairman of the Board of Directors of the Company (the “Board”) and President and Chief Executive Officer of the Company, loaned the Company $199 thousand; the Gail J. Maderis Revocable Trust, on behalf of Ms. Maderis, a Director of the Company, loaned the Company $71 thousand; Dr. McPherson, a Director of the Company, loaned the Company $20 thousand; Pioneer Singapore loaned the Company $1.4 million; and Mr. Fu loaned the Company $1.4 million. China Pioneer, Pioneer Hong Kong (who now holds all of the holdings of Pioneer Singapore due to a recent internal corporate reorganization) and Mr. Fu are the Company's two largest stockholders. All Notes were issued on December 30, 2015 except the Note payable to Mr. Fu, which was issued on January 12, 2016.

The proceeds from the Notes were used for general corporate purposes. Minimum quarterly payments of principal and interest began on March 31, 2016 and were scheduled to continue on the last day of each of June, September, December and March thereafter. The entire principal sum and any and all accrued and unpaid interest was payable in full upon the Company’s next financing, subsequent to the dates of the Notes, but in no event would the term of the Loan extend beyond December 30, 2018, except for the loan by Mr. Fu, the term of which was to extend three (3) years from the date of issuance. The Notes carried an interest rate of six percent (6%) per annum and could be prepaid in whole or in part at any time without premium or penalty.

In connection with the Notes, China Kington agreed to act as collateral agent for the benefit of the Lenders, in accordance with the terms of a collateral agency and intercreditor agreement (the “Collateral Agency Agreement”), which was entered into on December 30, 2015 between China Kington and the Lenders. To secure the Notes, China Kington perfected a security interest in all tangible and intangible assets of the Company, pursuant to a security agreement (the “Security Agreement”) between the Company and China Kington, which was entered into on December 30, 2015.

As consideration to China Kington for facilitating the Loan, the Company agreed to the following: (1) the grant of a first right of refusal for China Kington (or its designee that shall be acceptable to the Company in its reasonable discretion) to lead financings for the Company for a period that is the shorter of two (2) years or the day that the Company’s cash flow has been equal to or greater than $0 in each month for three (3) consecutive months, subject to certain limitations; (2) the participation of Mr. Sieczkarek as a Lender in the financing; (3) the participation of the Board, management and investors that the Board and management provide, to contribute an aggregate nine percent (9%) of funds in the Company’s next financing; (4) the appointment of two new members to the Company’s Board by China Kington; and (5) the Company’s agreement to reasonably cooperate with reasonable requests made by an auditor engaged, and paid for, by China Kington, subject to certain limitations. Upon the recommendation of China Kington, and after reviewing their relevant experiences and background and discussing the same, on January 26, 2016 the Board of Directors unanimously appointed Mr. Mijia “Bob” Wu and Mr. Xiaoyan “Henry” Liu to serve as Class I and Class III members of the Board, respectively. Because Bob Wu is the Managing Director of China Kington, China Kington became a related party upon his appointment to the Board.

Upon closing the first tranche of an $11.8 million private placement on May 6, 2016 and by agreement with the Lenders, the Company used $2.5 million of the proceeds from the private placement to repay principal on the Notes issued to the Lenders.

Upon closing the second tranche of such $11.8 million private placement on August 1, 2016, the Company repaid the remaining principal on the Notes in the amount of $520 thousand.

As of December 31, 2016, outstanding amounts under these Notes was zero.

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NOTE 9. COMMITMENTS AND CONTINGENCIES

Operating Leases

On August 24, 2016, the Company entered into an Office Lease (the “Lease”), pursuant to which the Company leased approximately 7,799 rentable square feet of real property located on the eleventh floor (Suite 1150) at 2000 Powell Street, Emeryville, California 94608 (the “Premises”) from KBSIII Towers at Emeryville, LLC (the “Landlord”), for the Company’s new principal executive offices. The expiration date of the Lease is February 28, 2022, unless earlier terminated pursuant to any provision of the Lease. The Company also has the option to extend the term of the Lease for one five (5)-year period upon written notice to the Landlord which is no earlier than twelve (12) months and no later than nine (9) months prior to the expiration of the then current term. The effective monthly base rental rate for the first twelve (12) months of the Lease is $4.15 per square foot ($338,390 annually), and increases approximately three percent (3%) every eleven (11) months thereafter beginning with the thirteenth (13^th) month of the Lease, with a maximum monthly rental rate of $4.81 per square foot ($450,250 annually) for months sixty-one (61) to sixty-three (63) of the Lease. The Company will also be responsible for its share of the direct expenses of the Premises, or 2.16%, which includes certain additional operating expenses, utilities costs and tax expenses. The Landlord has agreed to abate all of the Company’s monthly base rental payments for the first three (3) full calendar months of the Lease. The Company was also required to provide a standby letter of credit (the “Letter of Credit”) as security for performance of its obligations and for all losses and damages the Landlord may suffer as a result of any default by the Company under the Lease in the initial amount of $323,658, which is secured by a certificate of deposit and is recorded in other assets. Provided that no default occurs under the terms of the Lease, and certain financial requirements are met, the Company will be entitled to periodically reduce the amount of the Letter of Credit down to a maximum of approximately $151,823 as of the last day of the sixtieth (60^th) full calendar month of the Lease.

The Company also leases laboratory facilities and office space at Suite 550, EmeryStation North Building, 5980 Horton Street, Emeryville, California (“EmeryStation”) under an operating lease which will expire on October 21, 2020. On July 11, 2016, the Company entered into a Sublease Agreement to sublease all 16,465 rentable square feet of real property at EmeryStation (the “Sublease Agreement”) that the Company currently leases at Emery Station. The commencement date under the Sublease Agreement was September 8, 2016. The expiration date of the Sublease Agreement is October 21, 2020, the expiration date of the Company’s lease for the Emery Station Premises, unless earlier terminated pursuant to any provision of the Company’s lease for EmeryStation, as amended, or the Sublease Agreement. As a result of the sublease, the Company recorded a non-cash loss of $40 thousand, and an impairment to leasehold improvements of $66 thousand, which were recorded to general and administrative expense.

Rent expense, net was $938 thousand, $1,008 thousand, and $1,045 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. The future minimum lease payments under these non-cancellable operating leases were as follows as of December 31, 2016:

(in thousands)	Lease Commitment
Year ending December 31:
2017	$	987
2018		1,083
2019		1,116
2020		1,026
2021		438
Thereafter		75
Total lease commitment	$	4,725

The Company’s monthly rent payments fluctuate under the master lease agreements. In accordance with U.S. GAAP, the Company recognizes rent expense on a straight-line basis, and records deferred rent for the difference between the amounts paid and recorded as expense. At December 31, 2016 and 2015, the Company had $327 thousand and $189 thousand of deferred rent, respectively.

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Sub-lease rental reimbursement in not deducted from the above table. The Company anticipates collecting $709 thousand, $609 thousand, $690 thousand, and $576 thousand in the years ending December 31, 2017, 2018, 2019, and 2020, respectively.

Directors and Officers Indemnity

As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director or officer insurance policy that limits its exposure and may enable it to recover a portion of any future payments. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, it has not recorded any liabilities for these agreements as of December 31, 2016.

In the normal course of business, the Company provides indemnifications of varying scope under its agreements with other companies, typically its clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with use or testing of its products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any third party with respect to its products. The term of these indemnification agreements is generally perpetual. The potential future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. The Company also maintains various liability insurance policies that limit its exposure. As a result, it believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2016.

Legal Matters

From time to time, the Company may be involved in various legal proceedings arising in the ordinary course of business. There are no matters at December 31, 2016, that, in the opinion of management, would have a material adverse effect on our financial position, results of operations or cash flows.

NOTE 10. WARRANT LIABILITY

In July 2011, the Company sold common stock and warrants in a registered direct financing. As part of this transaction, 139,520 warrants were issued with an exercise price of $33.25 and were exercisable from January 1, 2012 to July 5, 2016. The terms of the warrants require registered shares to be delivered upon each warrant’s exercise and also require possible cash payments to the warrant holders (in lieu of the warrant’s exercise) upon specified fundamental transactions involving the Company’s common stock, such as in an acquisition of the Company. Under ASC 480, Distinguishing Liabilities from Equity, the Company’s ability to deliver registered shares upon an exercise of the warrants and the Company’s potential obligation to cash-settle the warrants if specified fundamental transactions occur are deemed to be beyond the Company’s control. The warrants contain a provision according to which the warrant holder would have the option to receive cash, equal to the Black Scholes fair value of the remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480 requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss. The Lattice model provides for assumptions regarding volatility and risk-free interest rates within the total period to maturity. In addition, after January 5, 2012, and if the closing bid price per share of the common stock in the principal market equals or exceeds $66.50 for any ten trading days (which do not have to be consecutive) in a period of fifteen consecutive trading days, the Company has the right to require the exercise of one-third of the warrants then held by the warrant holders.

In October 2015, the holders of all warrants issued pursuant to the Company’s securities purchase agreement dated March 3, 2015 (the “2015 Securities Purchase Agreement”) agreed to reduce the length of notice required to such investors prior to the Company’s issuance of new securities from twenty business days to two business days, for the remainder of such investors’ pre-emptive right period (which expired March 3, 2016). The Company entered into these agreements to enable it to expeditiously raise capital in the October 2015 Offering (as described below) and future offerings. As consideration for these agreements, the Company amended certain provisions of both the warrants with a 15-month term (the “Short-Term Warrants”) and warrants with a five-year term (the “Long-Term Warrants”) issued pursuant to the 2015 Securities Purchase Agreement (together, the “March 2015 Warrants”) and the warrants issued pursuant to the placement agent agreement dated June 29, 2011 (the “July 2011 Warrants”). Specifically, the amendments decreased the exercise price for both the March 2015 Warrants and the July 2011 Warrants to $5.00 per share. In addition, the amendments extended the exercise expiration date for the Short-Term Warrants and the July 2011 Warrants to March 6, 2020. A price protection provision also was added to both the July 2011 Warrants and March 2015 Warrants, such that if the Company subsequently sells or otherwise disposes of Company common stock at a lower price per share than $5.00 or any securities exchangeable for common stock with a lower exercise price than $5.00, the exercise price of such warrants will be reduced to that lower price.

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In October 2015, the Company also entered into an underwriting agreement with Roth Capital Partners, LLC, relating to the public offering and sale of up to (i) 492,000 shares of the Company’s common stock; and (ii) warrants to purchase up to 442,802 shares of the Company’s common stock (the “October 2015 Warrants”) with an exercise price of $5.00 per share (the “October 2015 Offering”).

In February 2016, the strike price of the July 2011, March 2015 and October 2015 warrants was reduced to $1.81 per share, pursuant to the price protection provisions in such warrants, because the Company sold common stock to Mr. Jian Ping Fu at that price.

The Company evaluated the change in terms of the July 2011 Warrants and noted that the change in terms resulted in a revaluation at the time of the change. The warrants were re-issued and valued as of October 27, 2015 at $360,821 with the new terms, and a modification expense was recorded for the difference between the fair value of the warrants at their new terms after modification on October 27, 2015 and the fair value of the warrants at their original terms prior to modification as of October 27, 2015. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operation and comprehensive loss.

The key assumptions used to value the warrants after the modification at October 27, 2015 were as follows:

Assumption
Expected price volatility		80.00	%
Expected term (in years)		4.36
Risk-free interest rate		1.23	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.60

The shares of common stock and warrants were issued separately. Each warrant was exercisable immediately upon issuance and will expire 60 months from the date of issuance. The price to the public in the October 2015 Offering was $5.00 per share of common stock and related warrant. The net proceeds to the Company were approximately $2.1 million after deducting underwriting discounts and commissions and offering expenses.

The key assumptions used to value the warrant at December 31, 2016 and December 31, 2015 were as follows:

	Year Ended December 31,
Assumption	2016			2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.55		$	1.10

In March 2015, the Company issued both the Short-Term Warrants ($15.00 per share exercise price) and the Long-Term Warrants ($16.25 per share exercise price). At that time, the Company determined that these warrants qualified for equity accounting and did not contain embedded derivatives that required bifurcation. After the Company’s agreement to modify the terms of the March 2015 Warrants and July 2011 Warrants in October 2015, the Company evaluated the change in terms of the March 2015 Warrants and noted that the change in terms resulted in liability classification of both the Short-Term and Long-Term Warrants. The March 2015 Warrants were re-issued and valued as of October 27, 2015 at a total of $1.8 million with the new terms, and a modification expense was recorded at the difference between the fair value of the warrants on their new terms after modification as of October 27, 2015 and the fair value of the warrants on their original terms prior to modification as of October 27, 2015. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss.

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The key assumptions used to value the Short-Term and Long-Term Warrants after modification at October 27, 2015 were as follows:

Assumption
Expected price volatility		80.00	%
Expected term (in years)		4.36
Risk-free interest rate		1.23	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.78

The key assumptions used to value the Short-Term Warrants as of December 31, 2016, and December 31, 2015 were as follows:

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.47		$	1.16

The key assumptions used to value the Long-Term Warrants as of December 31, 2016, and December 31, 2015 were as follows:

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.55		$	1.16

As noted above, the Company issued warrants in connection with the October 2015 Offering. The Company evaluated the terms of the October 2015 Warrants and noted that under ASC 480, the Company’s potential obligation to cash-settle the warrants if specified fundamental transactions occur are deemed to be beyond the Company’s control. Due to this provision, ASC 480 requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss. The fair value of the warrants at issuance on October 27, 2015 was $1.3 million.

The key assumptions used to initially value the October 2015 warrants at October 27, 2015 were as follows:

Assumption
Expected price volatility		75.50	%
Expected term (in years)		5.00
Risk-free interest rate		1.38	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.82

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The key assumptions used to value the warrants as of December 31, 2016, and December 31, 2015 were as follows:

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		96.00	%		77.50	%
Expected term (in years)		3.83			4.83
Risk-free interest rate		1.66	%		1.72	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.60		$	1.21

During the third quarter of 2016, a total of 3,613,284 warrants to purchase 3,613,284 shares of common stock were exercised related to the July 2011, March 2015 and October 2015 warrants resulting in gross proceeds of $6.9 million. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of $1.6 million, with any change in fair value recorded in the consolidated income statement and comprehensive loss. The $1.6 million fair value was subsequently transferred to equity as of the date of their exercise.

During the fourth quarter of 2016, a total of 363,523 warrants to purchase 363,523 shares of common stock were exercised related to the October 2011, November 2015 and December 2015 warrants resulting in gross proceeds of $0.9 million. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of $0.5 million, with any change in fair value recorded in the consolidated income statement and comprehensive loss. The $0.5 million fair value was subsequently transferred to equity as of the date of their exercise.

The details of all outstanding warrant liability as of December 31, 2016, were as follows:

Shares and dollars in thousands	Shares		Warrant Liability
July 2011 Warrants		49	$	126
Long-Term Warrants		105		267
Short-Term Warrants		127		312
October 2015 Warrants		284		741
		565	$	1,446

NOTE 11. STOCKHOLDERS’ EQUITY (DEFICIT)

Amendments to Articles of Incorporation – Reverse Stock Split

Effective December 11, 2015, the Company amended its Certificate of Incorporation to effect a 1-for-25 reverse split of its outstanding common stock which was approved by our stockholders on December 11, 2015. The accompanying financial statements and related notes give retroactive effect to this reverse stock split.

Preferred Stock

Under the Company’s amended articles of incorporation, the Company is authorized to issue of up to 5,000,000 shares of preferred stock in such series and with such rights and preferences as may be approved by the board of directors. As of December 31, 2016 and December 31, 2015, there were no shares of preferred stock outstanding.

Common Stock

On March 25, 2014, the Company closed a public offering for the sale of 224,000 units, each unit consisting of (i) one share of common stock and (ii) one warrant to purchase 6.25 shares of common stock (or a total of 56,000 shares), at a purchase price of $30.00 per unit. The warrants were immediately exercisable for $39.00 per share expired eighteen months from the date of issuance. All of the shares of common stock and warrants issued in the offering (and the shares of common stock issuable upon exercise of the warrants) were offered pursuant to a shelf registration statement filed with, and declared effective by, the Securities and Exchange Commission. The shares of common stock and the warrants were immediately separable and were issued separately, but were purchased together.  The Company raised a total of $6.7 million from this offering, or approximately $6.0 million in net proceeds after deducting underwriting commissions of $470 thousand and other offering costs of $211 thousand.

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On October 16, 2014, the Company entered into an At-The-Market Offering Agreement (the “2014 ATM Agreement”) with Ascendiant under which it may offer and sell its common stock having aggregate sales proceeds of up to $10.0 million from time to time through Ascendiant as its sales agent. Sales of Company common stock through Ascendiant are made by means of ordinary brokers’ transactions on the NYSE MKT or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by the Company and Ascendiant. Ascendiant uses commercially reasonable efforts to sell Company common stock from time to time, based upon instructions from it (including any price, time or size limits or other customary parameters or conditions it may impose). The Company pays Ascendiant a commission of 3.0% of the gross sales proceeds of any common stock sold through Ascendiant under the 2014 ATM Agreement. The Company has also provided Ascendiant with customary indemnification rights. In connection with the 2014 ATM Agreement, the Company terminated its existing At-The-Market Offering Agreement with Ascendiant dated November 13, 2013. The Company is not obligated to make any sales of common stock under the 2014 ATM Agreement. The offering of shares of the Company’s common stock pursuant to the 2014 ATM Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the 2014 ATM Agreement, or (ii) termination of the 2014 ATM Agreement in accordance with its terms.

Pursuant to the 2014 ATM Agreement, the Company sold 1.3 million shares for gross proceeds of $1.2 million, or approximately $1.1 million in net proceeds after deducting offering costs and commissions of $81 thousand.  

On March 6, 2015, the Company closed a private placement offering of an aggregate of 370,993 immediately separable units, which included 370,933 shares of the Company’s common stock, 278,200 Long-Term Warrants and 370,933 Short-Term Warrants (the “March Offering”). The per unit purchase price was $12.50 for outside investors and $15.00 for Company insiders, and the exercise prices for the 15-month warrants and 5-year warrants were $15.00 and $16.25 per share, respectively. Also on March 6, 2015, the Company entered into a registration rights agreement with the purchasers, pursuant to which the Company agreed to file as many registration statements with the Securities and Exchange Commission (the “SEC”) as may be necessary to cover the resale of the shares of Company common stock issued in the offering, including those shares underlying the March 2015 Warrants, and to keep such registration statements effective for the terms defined therein. The Company raised a total of $4.7 million from this offering, or approximately $4.5 million in net proceeds after deducting offering costs of $200 thousand.

On May 22, 2015, the Company closed a private placement offering of an aggregate of 435,746 shares of the Company’s common stock and 217,873 warrants with a 12-month term (the “May Offering”). The purchase price for a share of Company common stock and related warrant was $15.75, and the exercise price for the warrants was $19.50 per share.  On May 18, 2015, the Company entered into a registration rights agreement with the purchasers, pursuant to which the Company agreed to use best efforts to file as many registration statements with the SEC as may be necessary to cover the resale of the shares of Company common stock issued in the offering, including those shares underlying the warrants, and to keep such registration statements effective for the terms defined therein. In connection with the May Offering, the Company agreed to enter into an additional definitive securities purchase agreement with the purchasers in the March Offering. In exchange for a waiver of certain pre-emptive rights granted to the purchasers in the March Offering, an additional 635,000 shares of Company common stock were issued to such purchasers (other than entities affiliated with the Company). The Company raised a total of $7.3 million from this offering, or approximately $6.4 million in net proceeds after deducting offering costs of $900 thousand. China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds received by the Company upon closing pursuant to the purchases non US citizens. The amount of such commission was approximately $408 thousand, and was included in the offering costs noted above.

On October 27, 2015, pursuant to an underwriting agreement with Roth Capital Partners, LLC, the Company closed a public offering of (i) 492,000 shares of the Company’s common stock; and (ii) warrants to purchase up to 468,280 shares of the Company’s common stock with an exercise price of $5.00 per share (the “October 2015 Warrants”). The shares of common stock and October 2015 Warrants were issued separately. Each October 2015 Warrant was exercisable immediately upon issuance and will expire 60 months from the date of issuance. The price to the public in this offering was $5.00 per share of common stock and related October 2015 Warrant. The Company raised a total of $2.3 million from this offering, or approximately $1.9 million in net proceeds after deducting underwriting discounts and offering costs of $400 thousand.

In February 2016, the Company entered into three securities purchase agreements (the “Purchase Agreements”) for the sale of an aggregate of 1,518,567 shares of the Company’s common stock (the “Common Stock”) to accredited investors for a total of $2.8 million. The Company entered into the first purchase agreement with Mr. Jian Ping Fu (the “Fu Agreement”), pursuant to which the Company agreed to issue and sell to Mr. Fu 696,590 shares of Common Stock, at a per share price of $1.81, which was a five percent (5%) discount to the closing price of the Common Stock on February 16, 2016, the date of the Fu Agreement. The Company entered into the second purchase agreement with Pioneer Singapore (the “Pioneer Agreement”), pursuant to which the Company agreed to issue and sell to Pioneer Singapore 696,590 shares of Common Stock, at a per share price of $1.91, which was the closing price of the Common Stock on February 16, 2016 with no discount. The Company entered into a third purchase agreement with Mark M. Sieczkarek (the “Sieczkarek Agreement”), pursuant to which the Company agreed to issue and sell to Mr. Sieczkarek 125,387 shares of Common Stock, at a per share price of $1.91, which was the closing price of the Common Stock on February 16, 2016 with no discount. The Common Stock issued by the Company pursuant to the Purchase Agreements has not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

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China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds received by the Company upon closing pursuant to the purchases by Pioneer Singapore and Mr. Fu. The amount of such commission was approximately $155 thousand.

On April 4, 2016, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) for the sale of an aggregate 6,173,299 shares of Common Stock, par value $0.01 per share and warrants (the “April 2016 Warrants”) exercisable for 3,086,651 Shares to accredited investors for an aggregate purchase price of $11.8 million (the “Private Placement”). The warrants have a 4-year term and an exercise price of $1.91, callable by the Company if the closing price of the Common Stock, as reported on the NYSE MKT, is $4.00 or greater for five sequential trading days. The Private Placement closed in two tranches, the first of which closed on May 5, 2016, resulting in proceeds to the Company of $7.8 million (the “Primary Closing”), and the second of which closed on August 1, 2016, resulting in proceeds of $4.0 million to the Company (the “Secondary Closing”). In the Primary Closing, the Company issued 4,079,058 shares of Common Stock and April 2016 Warrants exercisable for 2,039,530 shares of Common Stock. In the Secondary Closing, the Company issued 2,094,241 shares of Common Stock and April 2016 Warrants exercisable for 1,047,121 shares of Common Stock. Both the Primary Closing and the Secondary Closing were subject to the same terms, containing customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Purchasers (as defined below) and other obligations of the parties and termination provisions.

China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds received by the Company upon closing pursuant to the purchases by certain investors. The amount of such commission was approximately $618 thousand.

Also on April 4, 2016, the Company entered into a separate registration rights agreement (the “Registration Rights Agreement”) with Messrs. Andros and Geckler, Dr. Rider, and the Children’s Brain Disease Foundation (the “Participating Purchasers”), pursuant to which the Company agreed to file as many registration statements with the SEC as may be necessary to cover the resale of the shares and the April 2016 Warrants held by the Participating Purchasers, to use its commercially reasonable efforts to have all such registration statements declared effective within the time frames set forth in the Securities Purchase Agreement and the Registration Rights Agreement, and to keep such registration statements effective for the terms defined therein. The Company filed such Registration Statement to cover the resale of the shares and April 2016 Warrants held by the Participating Purchasers with the SEC on June 9, 2016 and received effectiveness of such Registration Statement on June 20, 2016 (Registration Number 333-211943).

During the third quarter of 2016, the Company recorded $6.6 million in net proceeds upon the exercise of 3,613,284 of the Company’s warrants for 3,613,284 shares of the Company’s Common Stock, including all of the warrants issued in May 2016 and August 2016. As consideration for the facilitation of the exercise of certain of these warrants held by non-U.S. citizens domiciled outside of the United States, China Kington received a six percent (6%) commission on the aggregate proceeds to the Company pursuant to such exercises. The amount of such commission was approximately $338 thousand.

During the fourth quarter of 2016, the Company recorded $0.9 million in net proceeds upon the exercise of 363,523 of the Company’s warrants for 363,523 shares of the Company’s Common Stock. As consideration for the facilitation of the exercise of certain of these warrants held by non-U.S. citizens domiciled outside of the United States, China Kington received a six percent (6%) commission on the aggregate proceeds to the Company pursuant to such exercises. The amount of such commission was approximately $32 thousand.

Stock Warrants

In July 2011, 139,520 warrants were issued in connection with our July 2011 registered direct financing. These warrants were issued with an exercise price of $33.25 and were set to expire on July 5, 2016. In October 2015, the exercise expiration date was extended until March 6, 2020. Outstanding warrants were exercisable at December 31, 2016. See Note 10 for further details on these warrants.

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In March 2015, the Company issued 278,200 Long-Term Warrants and 370,933 Short-Term Warrants. Outstanding March 2015 Warrants were exercisable at December 31, 2016. See Note 10 for further details on these warrants.

In May 2015, the Company issued 217,873 warrants with a 12-month term and an exercise price of $19.50 per share. The warrants became exercisable at any time on or after November 22, 2015, six months from the date of issuance, and will continue to be exercisable for one year thereafter. These outstanding warrants were exercisable at December 31, 2015. See Note 10 for further details on these warrants.

In October 2015, the Company issued warrants to purchase up to 442,800 shares of the Company’s common stock with an exercise price of $5.00 per share. Each warrant was exercisable immediately upon issuance and will expire 60 months from the date of issuance. A price protection provision was included in such warrants, such that if the Company subsequently sells or otherwise disposes of Company common stock at a lower price per share than $5.00 or any securities exchangeable for common stock with a lower exercise price than $5.00, the exercise price of such warrants will be reduced to that lower price. See Note 10 for further details on these warrants. 

In February 2016, the strike prices of the July 2011, March 2015 Short-Term and Long-Term, and October 2015 warrants were reduced to $1.81 per share, pursuant to the price protection provisions in such warrants, because the Company sold common stock to Mr. Jian Ping Fu at that price.

In May 2016, the Company issued 2,039,530 warrants at the Primary Closing pursuant to the Securities Purchase Agreement. Please see the preceding subsection, “Common Stock,” for further details.

In August 2016, the Company issued 1,047,121 warrants at the Secondary Closing pursuant to the Securities Purchase Agreement. Please see the preceding subsection, “Common Stock,” for further details.

Effective September 29, 2016, the Company modified the exercise price of all warrants issued pursuant to the securities purchase agreement, dated May 18, 2015, from $19.50 to $3.15 per share, which reflected a discount of approximately sixteen percent (16%) to the closing price of the Company’s Common Stock on September 27, 2016. The Company has estimated the value of warrant modification as of the date of the modification by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. As a result of this modification, the Company recorded a non-cash loss of $270 thousand in general and administrative expense in the consolidate statement of operation and comprehensive loss.

The following table summarizes information about the Company’s warrants outstanding at December 31, 2016, 2015 and 2014, and activity during the three years then ended.  

(in thousands)	Warrants			Weighted- Average Exercise Price
Outstanding at December 31, 2013		192		$	43.00
Warrants granted		55		$	39.00
Warrants expired		(50	)	$	68.75
Outstanding at December 31, 2014		197		$	35.23
Warrants granted		1,317		$	7.40
Warrants expired		(56	)	$	39.00
Outstanding at December 31, 2015		1,458		$	5.19
Warrants granted		3,087		$	1.91
Warrants exercised		(3,977	)	$	1.95
Warrants expired		(3	)	$	78.13
Outstanding at December 31, 2016		565		$	1.81

NOTE 12. EQUITY-BASED COMPENSATION

Equity Compensation Plans

In October 2007, the Company adopted the 2007 Omnibus Incentive Plan (the “2007 Plan”) to provide for the granting of stock awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the board of directors. At the inception of the 2007 Plan, 40,000 shares were reserved for issuance under the 2007 Plan.  

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For the years from 2009 to 2012, the number of shares of common stock authorized for issuance under the 2007 Plan increased annually in an amount equal to the lesser of (a) 40,000 shares; (b) 4% of the number of shares of the Company’s common stock outstanding on the last day of the preceding year; or (c) such lesser number as determined by the Board.  Accordingly, an additional 40,000, 37,427, and 37,207 shares of common stock were authorized for issuance under the 2007 Plan in January 2012, 2011 and 2010, respectively. Beginning in 2013, the shareholders voted to remove the 40,000 share cap and the 2007 Plan increases annually by 4% of the number of shares of the Company’s common stock outstanding on the last day of the preceding year. Accordingly, an additional 32,646 and 59,157 shares of common stock were authorized for issuance under the 2007 Plan in January 2014 and 2013, respectively. On March 30^th, 2015, the Company filed a registration statement to add an additional 82,461 shares to the 2007 Plan. In January 2016, the Company added 139,449 shares to the Plan, per the Plan’s evergreen provision. On May 26, 2016, the stockholders of the Company approved an amendment to the 2007 Plan to increase the number of shares of Company common stock reserved for issuance thereunder by 1,124,826 shares. The aggregate reserved number of shares available under the 2007 Plan is 2,318,486 shares. As of December 31, 2016, there were 53,587 shares available for future grant under the 2007 Plan.

Under the terms of the 2007 Plan, the exercise price of incentive stock options may not be less than 100% of the fair value of the common stock on the date of grant and, if granted to an owner of more than 10% of the Company’s stock, then not less than 110%. Stock options granted under the 2007 Plan expire no later than ten years from the date of grant. Stock options granted to employees generally vest over four years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service. Any options granted prior to October 2007 include early exercise provisions that allow for full exercise of the option prior to the option vesting, subject to certain repurchase provisions. The Company issues new shares to satisfy option exercises under the plans. 

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Stock Based Compensation Summary

The following table summarizes information about the Company’s stock options and restricted stock outstanding at December 31, 2016, 2015 and 2014, and activity during the three years then ended:

(in thousands, except years and per share data)	Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2013		287		$	42.00		6.6		422
Options granted		68		$	22.50
Restricted stock units granted		3		$	—
Options exercised		(2	)	$	14.00
Restricted stock units vested		(4	)	$	—
Options forfeited/cancelled		(29	)	$	36.50
Outstanding at December 31, 2014		323		$	38.25		6.3		23
Options granted		85		$	11.20
Restricted stock units granted		16		$	—
Options exercised		-		$	—
Restricted stock units vested		(6	)	$	—
Options forfeited/cancelled		(28	)	$	30.58
Restricted stock units cancelled		(2	)	$	—
Outstanding at December 31, 2015		388		$	32.03		6.2		19
Options granted		1,227		$	2.74
Restricted stock units granted		104		$	—
Options exercised		-		$	—
Restricted stock units vested		(114	)	$	—
Options forfeited/cancelled		(116	)	$	28.27
Restricted stock units cancelled		-		$	—
Outstanding at December 31, 2016		1,489		$	8.38		8.7	$	702
Vested and expected to vest at December 31, 2016		1,466		$	8.45		8.6	$	691
Vested at December 31, 2016		402		$	22.45		6.6	$	—
Exercisable at December 31, 2016		402		$	22.45		6.6	$	—

For options that have a quoted market price in excess of the exercise price (“in-the-money options”), the aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE MKT as of December 31, 2016. There were no stock options exercised during the year ended December 31, 2016. The Company received no cash payments for the exercise of stock options during the years ended December 31, 2016 and December 31, 2015. The Company received $34 thousand in cash payments for the exercise of stock options during the year ended December 31, 2014. The aggregate intrinsic value of stock option awards exercised was $0, $4 thousand and $32 thousand for the years ended December 31, 2016, 2015 and 2014, respectively, as determined at the date of option exercise.

As of December 31, 2016, total unrecognized compensation cost related to unvested stock options and restricted stock was $1.5 million. This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive loss over the remaining weighted average vesting period of 2.02 years.

Stock Option Awards to Employees and Directors

The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted. The Company has estimated the value of stock option awards as of the date of grant by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. See Note 2 for a description of the accounting policies that the Company applies to value its stock-based awards.

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During the years ended December 31, 2016, 2015 and 2014, the Company granted options to employees and directors to purchase an aggregate of 1,139,000, 59,000 and 52,000 shares of common stock, respectively.

The weighted average assumptions used in determining the value of options granted and a summary of the methodology applied to develop each assumption are as follows:

	Year Ended December 31,
Assumption	2016			2015			2014
Expected price volatility		84.47	%		77.22	%		76.88	%
Expected term (in years)		7.03			6.8			6.5
Risk-free interest rate		1.57	%		1.76	%		2.06	%
Dividend yield		0.00	%		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	2.06		$	7.35		$	15.25

Expected Price Volatility—This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock and comparable companies from a representative peer group selected based on industry and market capitalization data.

Expected Term—This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.

Risk-Free Interest Rate—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.

Dividend Yield—We have not made any dividend payments nor do we have plans to pay dividends in the foreseeable future.

Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

Additionally, during the years ended December 31, 2016, 2015 and 2014, the Company issued 64,000, 16,000 and 2,000 shares of common stock to employees, respectively.

For the years ended December 31, 2016, 2015 and 2014, we recognized stock-based compensation expense of $1,489 thousand, $1,193 thousand and $853 thousand, respectively, for option awards to employees and directors.

In the second quarter of 2015, the Company modified stock options owned by two of its directors, Mr. Cashion and Mr. Wicks, each of whom retired at the Company’s 2015 annual meeting of stockholders in June 2015. All outstanding stock options held by Mr. Cashion and Mr. Wicks became fully vested upon retirement, and the option exercise period for Mr. Cashion and Mr. Wicks was extended from three months to four years, calculated from the date of retirement. Options with an expiration date prior to the end of the exercise period maintained the same expiration date. In connection with the stock option modification, the Company recognized stock-based compensation expense of $185 thousand. 

During the second and third quarters of 2016, the Company modified stock options held by two of its directors, Mr. Radaelli and Mr. McPherson, each of whom resigned as directors of the Company, effective May 6, 2016 and August 24, 2016, respectively. All outstanding stock options held by Mr. Radaelli and Mr. McPherson became fully vested upon retirement, and the option exercise period for Mr. Radaelli and Mr. McPherson was extended from three months to four years, calculated from each former director’s respective date of resignation. Options with an expiration date prior to the end of the exercise period maintained the same expiration date. In connection with the stock option modification, the Company recognized stock-based compensation expense of $58 thousand.

54

Stock-Based Awards to Non-Employees

During the years ended December 31, 2016, 2015 and 2014, the Company granted options to purchase an aggregate of 89,000, 27,000, and 14,000 shares of common stock, respectively, to non-employees in exchange for advisory and consulting services. The stock options are recorded at their fair value on the measurement date and recognized over the respective service or vesting period. The fair value of the stock options granted was calculated using the Black-Scholes-Merton option pricing model based upon the following assumptions:

	Year Ended December 31,
Assumption	2016			2015			2014
Expected price volatility		87.68	%		83.77	%		79.10	%
Expected term (in years)		10.0			9.6			8.6
Risk-free interest rate		1.61	%		2.18	%		2.28	%
Dividend yield		0.00	%		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	2.29		$	7.15		$	15.25

In addition, the Company granted restricted stock to non-employees totaling 41,000, 500 and 600 shares of common stock in the years ended December 31, 2016, 2015 and 2014, respectively, in exchange for advisory and consulting services. 

For the years ended December 31, 2016, 2015 and 2014, the Company recognized stock-based compensation expense of $262 thousand, $188 thousand and $189 thousand, respectively, related to non-employee options and restricted stock grants.

In November 2015, Dr. Ron Najafi resigned from his position as President as CEO of the Company. As part of his separation agreement, in December 2016, the Company paid him a portion of the amount due under the agreement via a combination of registered shares and cash during fiscal year 2016. The expense related to this separation agreement was accrued for and expensed in the year ended December 31, 2015, and the shares were issued to him via fully vested restricted stock in December 2016. In January 2017, the remaining portion of the amount due under the agreement was paid via a combination or registered shard and cash.

In March 2016, Roy Wu left the Company as Senior Vice President of Business Development. As part of his separation agreement, in March 2016, the Company paid him a combination of stock and cash. The expense related to this separation agreement was accrued for and expensed in the year ended December 31, 2015 based upon the known terms, and the shares were issued to him via fully vested restricted stock in March 2016.

Summary of Stock-Based Compensation Expense

A summary of the stock-based compensation expense included in results of operations for the option and stock awards discussed above is as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Research and development	$	195	$	449	$	376
Sales and Marketing		132		-		-
General and administrative		1,424		933		666
Total stock-based compensation expense	$	1,751	$	1,382	$	1,042

Since the Company has operating losses and net operating loss carryforwards, there are no tax benefits associated with stock-based compensation expense.

NOTE 13. LICENSE, COLLABORATION AND DISTRIBUTION AGREEMENTS

Virbac

In April 2012, the Company entered into a feasibility and option agreement with Virbac, a global animal health company, for the development and potential commercialization of Aganocides for a number of veterinary uses for companion animals. Under the terms of the agreement, NovaBay received an upfront payment and is entitled to additional support for research and development.

55

In April 2013, the Company entered into a collaboration and license agreement with Virbac. Under this new agreement, Virbac acquired exclusive worldwide rights to develop the Company’s proprietary compound, auriclosene (NVC-422), for global veterinary markets for companion animals.  The Company received an option exercise fee and may receive future development and pre-commercial milestone payments as a result of the collaboration.

Revenue has been recognized under the agreement as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Materials, Equipment, and Contract Study Costs	$	—	$	—	$	39

The Company had deferred revenue balances of $246 thousand in each of the years ended December 31, 2016, 2015 and 2014, related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.

NeutroPhase Distribution Agreements

In January 2012, the Company entered into a distribution agreement with China Pioneer Pharma Holdings, Ltd. (“China Pioneer”), a Shanghai-based company that markets high-end pharmaceutical products into China and an affiliate of Pioneer Singapore, for the commercialization of NeutroPhase in this territory. Under the terms of the agreement, NovaBay received an upfront payment of $312,500. NovaBay also received $312,500 in January 2013, related to the submission of the first marketing approval for the product to the CFDA. The deferred revenue was recognized as the purchase discounts were earned, with the remaining deferred revenue recognized ratably over the product distribution period. During the year ended December 31, 2014, NovaBay received $625,000 upon receipt of a marketing approval of the product from the CFDA.

In September 2012, the Company entered into two agreements with Pioneer: (1) an international distribution agreement (“Distribution Agreement”) and (2) a unit purchase agreement (“Purchase Agreement”). These agreements were combined and accounted for as one arrangement with one unit of accounting for revenue recognition purposes.

Pursuant to the terms of the Distribution Agreement, Pioneer has the right to distribute NeutroPhase, upon a marketing approval from a Regulatory Authority, in certain territories in Asia (other than China). Upon execution of the Distribution Agreement, the Company received an upfront payment, which was recorded as deferred revenue. Pioneer is also obligated to make certain additional payments to the Company upon receipt of the marketing approval. The Distribution Agreement further provides that Pioneer is entitled to a cumulative purchase discount not to exceed $500,000 upon the purchase of NeutroPhase product, payable in NovaBay unregistered restricted common stock.

Pursuant to the Purchase Agreement, we also received $2.5 million from Pioneer for the purchase of restricted units (comprising one share of common stock and a warrant for the purchase of one share of common stock). The unit purchase was completed in two tranches: (1) 800,000 units in September 2012; and (2) 1,200,000 units in October 2012, with both tranches at a purchase price of $1.25 per unit. The fair value of the total units sold was $3.5 million, based upon the trading price of our common stock on the dates the units were purchased and the fair value of the warrants based on the Black-Scholes Merton option pricing model. Because the aggregate fair value of the units on the dates of purchase exceeded the $2.5 million in proceeds received from the unit purchase by approximately $1 million, we reallocated $600,000 from deferred revenue to stockholders’ equity as consideration for the purchase of the units.  

In December 2013, the Company announced it had expanded its NeutroPhase commercial partnership agreement with Pioneer. The expanded agreement includes licensing rights to two new products, Avenova and CelleRx, which were developed internally by NovaBay. The expanded partnership agreement covers the commercialization and distribution of these products in China and 11 countries in Southeast Asia.

Revenue has been recognized under these agreements as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	94	$	25	$	47
Product sales		324		70		161
	$	418	$	95	$	208

56

The Company had deferred revenue balances of $1.0 million, $1.1 million, and $1.2 million, respectively, at December 31, 2016, 2015 and 2014, related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.

On February 7, 2012 the Company to enter into a distribution agreement with Integrated Healing Technologies, LLC, (“IHT”) to distribute NeutroPhase. NovaBay received an upfront payment of $750,000.

Revenue has been recognized under this agreement as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	21	$	5	$	7
Product sales		332		34		101
	$	353	$	39	$	108

 The Company had deferred revenue balances of $653 thousand, $674 thousand, and $679 thousand, respectively, at December 31, 2016, 2015 and 2014, related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.

On June 1, 2013 the Company to enter into a distribution agreement with Principal Business Enterprise Inc., (“PBE”) to distribute NeutroPhase. NovaBay received an upfront payment of $200,000.

Revenue has been recognized under this agreement as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	—	$	1	$	4
Product sales		22		66		104
	$	22	$	67	$	108

 The Company had deferred revenue balances of $194 thousand, $195 thousand, and $196 thousand, respectively, at December 31, 2016, 2015 and 2014, related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.

Avenova Distribution Agreements

In November 2014, the Company signed a nationwide distribution agreement for its Avenova product with McKesson Corporation (“McKesson”) as part of the Company’s commercialization strategy. McKesson makes Avenova widely available in local pharmacies and major retail chains across the U.S., such as Wal-Mart, Costco, CVS and Target. [In January 2015, the Company signed a nationwide distribution agreement with Cardinal Health. In April 2015, the Company also signed a nationwide distribution agreement with AmerisourceBergen to market Avenova. Since December 2015, the Company has signed nationwide distribution agreements with Willow Pharmacy, Allure Pharmacy, Smith Drug Company and Dakota Drug to market Avenova.

During the years ended December 31, 2016, 2015 and, 2014, the Company earned $7.3 million, $947 thousand and $4 thousand, respectively, in net sales revenue for its Avenova product from its distribution agreements.

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The Company had a deferred revenue balance of $1,924 thousand and $24 thousand as of December 31, 2016 and December 31, 2015, respectively, for its Avenova product from its distribution agreements.

NOTE 14. EMPLOYEE BENEFIT PLAN

We have a 401(k) plan covering all eligible employees. We are not required to contribute to the plan and have made no contributions through December 31, 2016. 

NOTE 15. INCOME TAXES

The federal and state income tax provision is summarized as follows (in thousands):

	Year Ending December 31
(in thousands)	2016		2015		2014
Current
Federal	$	—	$	—	$	—
State		2		2		2
Other		—		—		—
Total current tax expense		2		2		2
Deferred
Federal		—		—		—
State		—		—		—
Other		—		—		—
Total deferred tax expense		—		—		—
Income tax provision	$	2	$	2	$	2

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The tax effects of significant items comprising the Company's deferred taxes as of December 31, are as follows:

	December 31
(in thousands)	2016			2015
Deferred tax assets:
Net operating losses	$	34,902		$	31,464
Accruals		287			403
Deferred revenue		829			954
Stock options		1,894			1,558
Other deferred tax assets		765			652
Total deferred tax assets		38,677			35,031
Deferred tax liabilities:
Property and equipment		(32	)		(28	)
Total deferred tax liabilities		(32	)		(28	)
Valuation allowance		(38,645	)		(35,003	)
Net deferred taxes	$	—		$	—

The Company records the tax benefit of net operating loss carryforwards and temporary differences as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets is currently not likely to be realized and, accordingly, has provided a valuation allowance.

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The valuation allowance increased by the following amounts (in thousands):

2016		2015		2014
$	3,642	$	8,101	$	6,286

In accordance with ASC 718 Compensation – Stock Compensation, the Company has excluded from deferred tax assets benefits attributable to employee stock option exercises. Therefore, these amounts are not included in gross or net deferred tax assets. The benefit of these NOL carryforwards, totaling $1.1 million and $0.7 million at December 31, 2016 for federal and California tax, respectively, will only be recorded to equity when they reduce cash taxes payable.

NOL and tax credit carryforwards as of December 31, 2016, are as follows (in thousands):

			Expiration
	Amount		Years
Net operating losses, federal	$	90,165	2024	-	2036
Net operating losses, state	$	78,219	2028	-	2036
Tax credits, federal	$	1,316	2031	-	2036
Tax credits, state	$	282	do not expire

Under U.S. federal tax law, the amount and availability of tax benefits are subject to a variety of interpretations and restrictive tests. Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to ownership changes that have occurred previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986, and similar state provisions. Ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on two occasions which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in one or more changes of control, as defined by Section 382. The Company has not currently completed a study to assess whether any change of control has occurred, or whether there have been multiple changes of control since the Company’s formation, due to the significant complexity and cost associated with the study. If the Company has experienced a change of control at any time since its formation, its NOL carryforwards and tax credits may not be available, or their utilization could be subject to an annual limitation under Section 382. A full valuation allowance has been provided against the Company’s NOL carryforwards, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Accordingly, there would be no impact on the consolidated balance sheet or statement of operations and comprehensive loss if an adjustment is required.

The effective tax rate of the Company's provision (benefit) for income taxes differs from the federal statutory rate as follows:

	Year Ending December 31
(in thousands)	2016			2015			2014
Income tax provision (benefit) at federal statutory rate	$	(4,471	)	$	(6,439	)	$	(5,154	)
State tax		(157	)		(1,060	)		(818	)
ISO-related expense for GAAP		52			164			144
Change in valuation allowance		3,641			8,101			6,286
Revaluation of warrant liability		806			(731	)		(565	)
Tax credits		(31	)		(123	)		(44	)
Other		162			90			153
Total	$	2		$	2		$	2

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Uncertain Income Tax Positions

The Company adopted the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, on January 1, 2007. There was no impact on our consolidated financial position, results of operations and cash flows as a result of adoption. A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended December 31, 2016 and 2015 is as follows:

	Year ended December 31,
(in thousands)	2016		2015
Unrecognized benefit - beginning of period	$	957	$	811
Gross increases - current period tax positions		17		76
Unrecognized benefit - end of period	$	974	$	957

The Company’s policy will be to recognize interest and penalties related to income taxes as a component of income tax expense. It is subject to income tax examinations for U.S. incomes taxes and state income taxes from 2004 and 2006 forward respectively. It does not anticipate that total unrecognized tax benefits will significantly change in the next 12 months.

NOTE 16. RELATED PARTY TRANSACTIONS      

Related Party Loans

See Note 8, “Related Party Notes Payable” for a description of the Loan with the following related parties: Mr. Sieczkarek, Chairman of the Board, President and Chief Executive Officer of the Company; the Gail J. Maderis Revocable Trust, on behalf of Ms. Maderis, a Director of the Company; Dr. McPherson, a Director of the Company; and Pioneer China, Pioneer Singapore as a wholly-owned subsidiary of Pioneer China and recipient of all of the holdings of Pioneer Singapore as a result of a recent internal corporate reorganization, and Mr. Fu, the Company’s two largest stockholders. The Loan was fully paid off as of August 1, 2016.

Related Party Financing

See Note 11, “Stockholders’ Equity (Deficit)” – “Common Stock” for a description of the February 2016 Purchase Agreements and April 2016 Securities Purchase Agreement. The following related parties participated in both transactions: Mr. Sieczkarek, Chairman of the Board, President and Chief Executive Officer of the Company; and Pioneer Singapore and Mr. Fu, the Company’s two largest stockholders.

Related Party Revenue 

The Company recognized related party revenues from product sales and license and collaboration fees of $418 thousand, $95 thousand, and $208 thousand for the years ended December 31 2016, 2015 and 2014, respectively. The Company had related party accounts receivable of $75 thousand and $0 as of December 31, 2016 and December 31, 2015, respectively. See Note 13, “License, Collaboration and Distribution Agreements - NeutroPhase Distribution Agreements,” for additional information regarding the Company’s distribution agreements with Pioneer, one of the Company’s largest stockholder.

Related Party Expenses 

The Company recognized related party commission fees of $1.1 million, $408 thousand, and $0 for the years ended December 31 2016, 2015, and 2014, respectively. These fees were paid to China Kington, representing the commission on sale of the Company’s common stock and the exercise of the Company’s warrants. See Note 11, “Stockholders’ Equity (Deficit)” – “Common Stock” for additional information regarding such commissions.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the Exchange Act).

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Assessing the costs and benefits of such controls and procedures necessarily involves the exercise of judgment by management. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

As disclosed in our 10-Q for the period ended September 30, 2016, we determined there was a material weakness in our internal controls over financial reporting. During the fourth quarter of fiscal 2016, we remediated the material weakness by implementing procedures to ensure that complex warrant liability matters associated with the exercise of those warrants are appropriately analyzed and recorded in the financial statements We enhanced the design of our control procedures to require that these matters be thoroughly researched and documented and, when necessary, engage technical expertise on complex accounting matters to support the accounting and finance team and the internal control environment. As a result of these measures, we have concluded that the material weakness that existed in the design of our internal control over financial reporting at September 31, 2016 has been remediated as of December 31, 2016

Based upon that evaluation at December 31, 2016, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure, at the reasonable assurance level, that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016.  Our management utilized the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission to conduct an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016. Our management has concluded that, as of December 31, 2016, our internal control over financial reporting was effective based on these criteria.

Changes in Internal Control Over Financial Reporting

Except for the remediation of the material weakness described above, there were no changes in our internal control over financial reporting which has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item will be included in our Proxy Statement for the 2017 Annual Meeting of Stockholders (the “2017 Proxy Statement”) and is incorporated herein by reference.

61

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be included in the 2017 Proxy Statement and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report:

(1) Financial Statements. The financial statements listed in the Index for Item 8 hereof are filed as part of this report.

(2) Financial Statement Schedules. All schedules have been omitted because they are not required or the required information is included in our consolidated financial statements and notes thereto.

(3) Exhibits. See the Exhibit Index which follows the signature page of this report, which is incorporated herein by reference.

62

Exhibit 24.1

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 23, 2017
	By:	/s/   Mark M. Sieczkarek
		Director and Chief Executive Officer

POWER OF ATTORNEY

We, the undersigned officers and directors of NovaBay Pharmaceuticals, Inc., do hereby constitute and appoint Mark M. Sieczkarek and Thomas J. Paulson, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:

Signature	Title	Date
/s/ MARK M. SIECZKAREK	Chairman of the Board and Interim Chief	March 23, 2017
Mark M. Sieczkarek, M.B.A.	Executive Officer (principal executive officer)
/s/ THOMAS PAULSON	Chief Financial Officer and Treasurer (principal	March 23, 2017
Thomas J. Paulson, M.B.A.	financial and accounting officer)
/s/ PAUL FREIMAN	Lead Independent Director	March 23 2017
Paul E. Freiman, Ph.D
/s/ YONGHAO MA	Director	March 23, 2017
Yonfhao Ma, Ph.D. (Carl MA)
/s/ GAIL MADERIS	Director	March 23, 2017
Gail Maderis, M.B.A.
/s/ TODD ZAVODNICK	Director	March 23, 2017
Todd Zavodnick
/s/ XINZHOU LI	Director	March 23, 2017
Xinzhou Li
/s/ MIJIA WU	Director	March 23, 2017
Mijia Wu, M.B.A. (Bob WU)
/s/ XIAOYAN LIU	Director	March 23, 2017
Xiaoyan Liu (Henry LIU)

63

EXHIBIT INDEX

		Incorporation by Reference				Filed Herewith
Exhibit Number	Exhibit Description	Form	File Number	Exhibit/ Form 8-K Item Reference	Filing Date
3.1	Amended and Restated Certificate of Incorporation of NovaBay Pharmaceuticals, Inc.	8-K	001-33678	3.1	6/29/2010
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation of NovaBay Pharmaceuticals, Inc.	8-K	001-33678	3.1	6/04/2014
3.3	Certificate of Amendment of Amended and Restated Certificate of Incorporation of NovaBay Pharmaceuticals, Inc.	8-K	001-33678	3.1	10/02/2015
3.4	Certificate of Amendment of Amended and Restated Certificate of Incorporation of NovaBay Pharmaceuticals, Inc.	8-K	001-33678	3.1	12/21/2015
3.5	Bylaws	8-K	001-33678	3.2	6/29/2010
4.1	Form of 2011 Warrant, as amended (issued pursuant to the placement agent agreement dated June 29, 2011, as amended) (1)					X
4.2	Form of Warrant issued in March 2015 Offering, as amended (issued with 15-month term) (1)					X
4.3	Form of Warrant issued in March 2015 Offering, as amended (issued with 5-year term) (1)					X
4.4	Form of Warrant issued in May 2015 offering	10-Q	001-33678	4.7	8/13/2015
4.5	Form of Warrant issued in October 2015 offering, as amended (1)					X
4.6	Registration Rights Agreement (between the Company, Pioneer Pharma (Singapore) Pte. Ltd., and Anson Investments Master Fund LP, et al.)	8-K	001-33678	10.2	3/09/2015
4.7	Registration Rights Agreement (between the Company, China Kington Investment Co. Ltd. and Dr. Dean Rider)	10-Q	001-33678	4.9	8/13/2015
4.8	Registration Rights Agreement (among the Company and each of the purchasers named therein).	8-K	001-33678	4.2	4/05/2016
10.1+	Indemnity Agreement (Form of Indemnity Agreement between the Company and its Directors and Officers)	10-Q	001-33678	10.1	8/12/2010
10.2+	NovaCal Pharmaceuticals, Inc. 2005 Stock Option Plan	S-1, as amended	333-140714	10.2	3/30/2007
10.3+	NovaBay Pharmaceuticals, Inc. 2007 Omnibus Incentive Plan (as amended and restated)	S-8	[TBD]	99.1	1/24/2017
10.4+	NovaBay Pharmaceuticals, Inc. 2007 Omnibus Incentive Plan (Form Agreements to the 2007 Omnibus Incentive Plan)	S-1, as amended	333-140714	10.3	5/29/2007
10.5+	Executive Officer Cash Bonus Structure	10-K	001-33678	10.4	3/27/2012

64

		Incorporation by Reference				Filed Herewith
Exhibit Number	Exhibit Description	Form	File Number	Exhibit/ Form 8-K Item Reference	Filing Date
10.6	Long Term Strategic Bonus for Executives	8-K	001-33678	Item 5.02	4/24/2013
10.7+	Non-Employee Director Compensation Plan					X
10.8+	Separation Agreement (by and between the Company and Ramin “Ron” Najafi)	8-K	001-33678	10.1	11/19/2015
10.9+	Amendment to Separation Agreement, dated December 15, 2016 (by and between the Company and Ramin “Ron” Najafi)	8-K	001-33678	10.1	12/19/2016
10.10+	Separation Agreement, dated February 29, 2016 (by and between the Company and Roy Wu)	8-K	001-33678	10.1	3/01/2016
10.11+	Executive Employment Agreement (Employment Agreement of Mark M. Sieczkarek)	8-K	001-33678	10.1	5/27/2016
10.12+	Executive Employment Agreement (Employment Agreement of Thomas J. Paulson)	8-K	001-33678	10.2	1/05/2016
10.13+	Executive Employment Agreement (Employment Agreement of Justin M. Hall)	8-K	001-33678	10.3	1/05/2016
10.14	Office Lease between Emery Station Associates II, LLC (Landlord) and NovaCal Pharmaceuticals, Inc. (Tenant), Emerystation North	S-1, as amended	333-140714	10.10	3/30/2007
10.15	Fifth Amendment to Lease between Emery Station Office II, LLC (Landlord) and NovaCal Pharmaceuticals, Inc. (Tenant), Emerystation North Project	10-K	001-33678	10.20	3/14/2008
10.16	Sixth Amendment to Lease between Emery Station Office II, LLC (Landlord) and NovaCal Pharmaceuticals, Inc. (Tenant), Emerystation North Project	10-Q, as amended	001-33678	10.1	11/14/2008
10.17	Seventh Amendment to Lease between Emery Station Office II, LLC (Landlord) and NovaCal Pharmaceuticals, Inc. (Tenant), Emerystation North Project	10-Q	001-33678	10.2	8/09/2012
10.18	Eighth Amendment to Lease between Emery Station Office II, LLC (Landlord) and NovaCal Pharmaceuticals, Inc. (Tenant), Emerystation North Project	10-K	001-33678	10.19	3/04/2016
10.19	Office Lease (between the Company and KBSIII Towers at Emeryville, LLC)	8-K	001-33678	10.1	8/26/2016
10.20	Sublease Agreement by and between NovaBay Pharmaceuticals, Inc. and Zymergen, Inc., dated July 11, 2016	8-K	001-33678	10.1	7/15/2016
10.21†	Collaboration and License Agreement by and between NovaBay Pharmaceuticals, Inc. and Galderma S.A.	10-Q, as amended	001-33678	10.2	8/04/2009
10.22†	Amendment No. 1 to the Collaboration and License Agreement	10-K	001-33678	10.18	3/30/2010
10.23†	Amendment No. 2 to the Collaboration and License Agreement	10-K	001-33678	10.24	3/10/2011
10.24†	International Distribution Agreement (by and between the Company and Pioneer Pharma Co. Ltd.)	10-K	001-33678	10.18	3/27/2012

65

		Incorporation by Reference				Filed Herewith
Exhibit Number	Exhibit Description	Form	File Number	Exhibit/ Form 8-K Item Reference	Filing Date
10.25	Securities Purchase Agreement (between the Company, Pioneer Pharma (Singapore) Pte. Ltd., and Anson Investments Master Fund LP, et al.)	8-K	001-33678	10.1	03/09/2015
10.26	Securities Purchase Agreement (between the Company, China Kington Investment Co. Ltd. and Dr. Dean Rider)	10-Q	001-33678	10.1	8/13/2015
10.27	Stock Purchase Agreement (between the Company and the purchasers pursuant to the March 3, 2015 Securities Purchase Agreement)	10-Q	001-33678	10.2	8/13/2015
10.28	Securities Purchase Agreement (between the Company and Jian Ping Fu)	8-K	001-33678	10.1	2/17/2016
10.29	Securities Purchase Agreement (between the Company and Pioneer Pharma (Singapore) Pte. Ltd.)	8-K	001-33678	10.2	2/17/2016
10.30	Securities Purchase Agreement (between the Company and Mark M. Sieczkarek)	8-K	001-33678	10.3	2/17/2016
10.31	Securities Purchase Agreement (among the Company and each of the purchasers named therein).	8-K	001-33678	10.1	4/05/2016
10.32	Commission structure for warrant exercise	8-K	001-33678	Item 1.01	9/30/2016
23.1	Consent of OUM & Co. LLP					X
24.1	Power of Attorney (contained on signature page)					X
31.1	Certification of the Principal Executive Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a)					X
31.2	Certification of the Principal Financial Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a)					X
32.1‡	Certification by the Chief Executive Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)					X
32.2‡	Certification by the Chief Financial Officer of NovaBay Pharmaceuticals, Inc., as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)					X
101.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase					X

66

		Incorporation by Reference				Filed Herewith
Exhibit Number	Exhibit Description	Form	File Number	Exhibit/ Form 8-K Item Reference	Filing Date
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X

(1) These amended form of Warrants are being filed solely to reflect the revised exercise price previously disclosed in the Company’s periodic reports filed with the Securities and Exchange Commission.

+ Indicates a management contract or compensatory plan or arrangement

† NovaBay Pharmaceuticals, Inc. has been granted confidential treatment with respect to certain portions of this exhibit (indicated by asterisks), which have been separately filed with the Securities and Exchange Commission.

67  

EX-4.1

Exhibit 4.1

PURSUANT TO THE TERMS OF SECTION 1 AND SECTION 17 OF THIS WARRANT, ALL OR A PORTION OF THIS WARRANT MAY HAVE BEEN EXERCISED OR CANCELED, AND THEREFORE THE ACTUAL NUMBER OF WARRANT SHARES REPRESENTED BY THIS WARRANT MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF.  ANY TRANSFEREE OF THIS WARRANT SHOULD CONTACT NOVABAY PHARMACEUTICALS, INC. IN ADVANCE OF ACQUIRING THIS WARRANT TO BE APPRISED OF THE ACTUAL NUMBER OF SHARES THAT MAY BE ACQUIRED PURSUANT TO THE EXERCISE OF THIS WARRANT.

NOVABAY PHARMACEUTICALS, INC.

WARRANT TO PURCHASE COMMON STOCK

Warrant No.: 2011-[●]

Number of Shares of Common Stock:

Date of Issuance: July 5, 2011 (“Issuance Date”)

NovaBay Pharmaceuticals, Inc., a Delaware corporation (the “Company”), certifies that, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, [●], the registered holder hereof or its permitted assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price (as defined below) then in effect, upon surrender of this Warrant to Purchase Common Stock (including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement hereof, the “Warrant”), at any time or times on or after 180 days from the date hereof (the “Exercisability Date”), but not after 5:30 p.m., New York Time, on the Expiration Date (as defined below), [●]([●]) fully paid and nonassessable shares of Common Stock (as defined below) (the “Warrant Shares”).  Except as otherwise defined herein, capitalized terms in this Warrant shall have the meanings set forth in Section 14.  This Warrant is one of a series of warrants to purchase shares of Common Stock (collectively, the “Warrants”) issued pursuant to those certain Subscription Agreements, dated as of June 29, 2011 (the “Subscription Date”), by and among the Company and the investors (the “Investors”) referred to therein (the “Subscription Agreements”) pursuant to the Company’s Registration Statement on Form S-3 (No. 333-159917) (as amended) (the “Registration Statement”).

1.            EXERCISE OF WARRANT.

(a)             Mechanics of Exercise.  Subject to the terms and conditions hereof (including, without limitation, the limitations set forth in Section 1(e)), this Warrant may be exercised by the Holder on any day on or after the Exercisability Date, in whole or in part (but not as to fractional shares), by (i) delivery of a written notice, in the form attached hereto as Exhibit A (the “Exercise Notice”), of the Holder’s election to exercise this Warrant and (ii) if both (A) the Holder is not electing a Cashless Exercise (as defined below) pursuant to Section 1(d) of this Warrant and (B) a registration statement registering the issuance of the Warrant Shares under the Securities Act of 1933, as amended (the “Securities Act”), is effective and available for the issuance of the Warrant Shares, or an exemption from registration under the Securities Act is available for the issuance of the Warrant Shares, payment to the Company of an amount equal to the applicable Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the “Aggregate Exercise Price”) in cash or wire transfer of immediately available funds (a “Cash Exercise”) (the items under (i) and (ii) above, the “Exercise Delivery Documents”).  The Holder shall not be required to surrender this Warrant in order to effect an exercise hereunder; provided, however, that in the event that this Warrant is exercised in full or for the remaining unexercised portion hereof, the Holder shall deliver this Warrant to the Company for cancellation within a reasonable time after such exercise.  On or before the first Trading Day following the date on which the Company has received the Exercise Delivery Documents (the date upon which the Company has received all of the Exercise Delivery Documents, the “Exercise Date”), the Company shall transmit by facsimile or e-mail transmission an acknowledgment of confirmation of receipt of the Exercise Delivery Documents to the Holder and the Company’s transfer agent for the Common Stock (the “Transfer Agent”). The Company shall deliver any objection to the Exercise Delivery Documents on or before the second Trading Day following the date on which the Company has received all of the Exercise Delivery Documents.  On or before the second Trading Day following the date on which the Company has received all of the Exercise Delivery Documents (the “Share Delivery Date”), the Company shall, (X) provided that the Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program (the “FAST Program”) and so long as the certificates therefor are not required to bear a legend regarding restriction on transferability, upon the request of the Holder, credit such aggregate number of shares of Common Stock to which the Holder is entitled pursuant to such exercise to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system, or (Y), if the Transfer Agent is not participating in the FAST Program or if the certificates are required to bear a legend regarding restriction on transferability, issue and dispatch by overnight courier to the address as specified in the Exercise Notice, a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder is entitled pursuant to such exercise.  Upon delivery of the Exercise Delivery Documents, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date such Warrant Shares are credited to the Holder’s DTC account or the date of delivery of the certificates evidencing such Warrant Shares, as the case may be.  If this Warrant is submitted in connection with any exercise pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than the number of Warrant Shares being acquired upon an exercise, then the Company shall as soon as practicable and in no event later than three Trading Days after any such submission and at its own expense, issue a new Warrant (in accordance with Section 7(e)) representing the right to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant, less the number of Warrant Shares with respect to which this Warrant has been and/or is exercised.  The Company shall pay any and all taxes and other expenses of the Company (including overnight delivery charges) that may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder or an affiliate thereof.  The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

(b)             Exercise Price.  For purposes of this Warrant, “Exercise Price” means $1.81 per share of Common Stock, subject to adjustment as provided herein.

(c)             Failure to Timely Deliver Shares.  In addition to any other rights available to a Holder, if the Company fails to deliver to the Holder a certificate representing Warrant Shares by the third Trading Day after the Exercise Date, and if after such third Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within three Trading Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased less the Exercise Price (the “Buy-In Price”), at which point the Company’s obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Price on the date of the event giving rise to the Company’s obligation to deliver such certificate.

(d)           Cashless Exercise. Notwithstanding anything contained herein to the contrary, if a registration statement registering the issuance of the Warrant Shares under the Securities Act is not effective or available for the issuance of the Warrant Shares, the Holder may, in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (a “Cashless Exercise”):

Net Number = (A x B) - (A x C)

B

For purposes of the foregoing formula:

A=	the total number of shares with respect to which this Warrant is then being exercised.
B =	the Weighted Average Price of the shares of Common Stock (as reported by Bloomberg) on the date immediately preceding the date of the Exercise Notice.
C =	the Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

For purposes of Rule 144(d) promulgated under the Securities Act, as in effect on the date hereof, assuming the Holder is not an affiliate of the Company, it is intended that the Warrant Shares issued in a Cashless Exercise shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the closing date of the offering pursuant to which the Company was obligated to issue this Warrant.

(e)             Limitations on Exercises.  (1)  The Company shall not effect the exercise of this Warrant, and the Holder shall not have the right to exercise this Warrant, to the extent that after giving effect to such exercise, such Holder (together with such Holder’s affiliates and any other Persons acting as a group together) would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such exercise.  For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Person and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by such Person and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Person and its affiliates (including, without limitation, any convertible notes or convertible preferred stock or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein.  Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), it being acknowledged that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act, and the Holder is solely responsible for any schedules required to be filed in accordance therewith. For purposes of this Warrant, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q, Current Report on Form 8-K or other public filing with the Securities and Exchange Commission, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  For any reason at any time, upon the written or oral request of the Holder, where such request indicates that it is being made pursuant to this Warrant, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including the Warrants, by the Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  By written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such notice; provided, that (i) any such increase will not be effective until the 61st day after such notice is delivered to the Company and (ii) any such increase or decrease will apply only to the Holder and not to any other holder of Warrants. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.

(f)             No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share that the Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price.

2.           ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.  The Exercise Price and the number of Warrant Shares shall be adjusted from time to time as follows:

(a)             Adjustment upon Subdivision or Combination of Shares of Common Stock.  If the Company at any time on or after the Subscription Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Warrant Shares will be proportionately increased.  If the Company at any time on or after the Subscription Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares will be proportionately decreased.  Any adjustment under this Section 2(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(b)     Subsequent Equity Sales. If the Company or any subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents, at an effective price per share less than the Exercise Price then in effect (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price), then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to equal the Base Share Price. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 2(b) in respect of an Exempt Issuance. The Company shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance of any Common Stock or Common Stock Equivalents subject to this Section 2(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 2(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Exercise Notice.

(c)             Other Events.  If any event occurs of the type contemplated by the provisions of Section 2(a) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features to the holders of the Company’s equity securities), then the Company’s Board of Directors will make an appropriate adjustment in the Exercise Price and the number of Warrant Shares so as to protect the rights of the Holder; provided, that no such adjustment pursuant to this Section 2(c) will increase the Exercise Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2.

(d)             Notwithstanding anything to the contrary in this Warrant, in no event shall the Exercise Price be reduced below the par value of the Company’s Common Stock

3.           RIGHTS UPON DISTRIBUTION OF ASSETS.  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case:

(a)             any Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Exercise Price by a fraction of which (i) the numerator shall be the Weighted Average Price of the shares of Common Stock on the Trading Day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (ii) the denominator shall be the Weighted Average Price of the shares of Common Stock on the Trading Day immediately preceding such record date; and

(b)             the number of Warrant Shares shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding paragraph (a); provided, that in the event that the Distribution is of shares of Common Stock or common stock of a company whose common shares are traded on a national securities exchange or a national automated quotation system (“Other Shares of Common Stock”), then the Holder may elect to receive a warrant to purchase Other Shares of Common Stock in lieu of an increase in the number of Warrant Shares, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the number of shares of Other Shares of Common Stock that would have been payable to the Holder pursuant to the Distribution had the Holder exercised this Warrant immediately prior to such record date and with an aggregate exercise price equal to the product of the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding paragraph (a) and the number of Warrant Shares calculated in accordance with the first part of this paragraph (b).

4.            PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

(a)             Purchase Rights.  In addition to any adjustments pursuant to Section 2 above, if at any time prior to the Expiration Date the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, that to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Maximum Percentage, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Maximum Percentage, at which time the Holder shall be granted such right to the same extent as if there had been no such limitation).

(b)           Fundamental Transactions.  Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.  Upon consummation of the Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon exercise of this Warrant at any time after the consummation of the Fundamental Transaction, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property purchasable upon the exercise of the Warrant prior to such Fundamental Transaction), such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights), if any, that the Holder would have been entitled to receive upon the happening of such Fundamental Transaction had this Warrant been exercised immediately prior to such Fundamental Transaction, as adjusted in accordance with the provisions of this Warrant.  In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to ensure that the Holder will thereafter have the right to receive upon an exercise of this Warrant within 90 days after the consummation of the Fundamental Transaction but, in any event, prior to the Expiration Date, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property) purchasable upon the exercise of the Warrant prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights) which the Holder would have been entitled to receive upon the happening of such Fundamental Transaction had the Warrant been exercised immediately prior to such Fundamental Transaction and shall be applied without regard to any limitations on the exercise of this Warrant.  Provision made pursuant to the preceding sentence shall be in a form and substance reasonably satisfactory to the Required Holders.

(c)           Black Scholes Value. Notwithstanding the foregoing and the provisions of Section 4(b) above, in the event of the consummation of a Fundamental Transaction that is (1) an all-cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act or (3) a Fundamental Transaction involving a person or entity not traded on an Eligible Market, at the request of the Holder delivered at any time commencing on the earliest to occur of (x) the public disclosure of the Fundamental Transaction or (y) the consummation of the Fundamental Transaction, through the date that is ninety (90) days after the public disclosure of the consummation of such Fundamental Transaction by the Company pursuant to a Current Report on Form 8-K filed with the SEC, the Company or the Successor Entity (as the case may be) shall purchase this Warrant from the Holder on the later of (i) the date of consummation of the Fundamental Transaction and (ii) the fifth Trading Day following the date of such request, in each case by paying to the Holder cash in an amount equal to the Black Scholes Value.

(d)             The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and Corporate Events and shall be applied without regard to any limitations on the exercise of this Warrant.

5.           RESERVATION OF WARRANT SHARES.  The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of shares of Common Stock which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive or any other contingent purchase rights of Persons other than the Holder (taking into account the adjustments and restrictions in Section 2).  Such reservation shall comply with the provisions of Section 1.  The Company covenants that all shares of Common Stock so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable.  The Company will take all such actions as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed.

6.           WARRANT HOLDER NOT DEEMED A STOCKHOLDER.  Except as otherwise specifically provided herein, the Holder, solely in such Person’s capacity as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Person’s capacity as the Holder of this Warrant, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.

7.           REGISTRATION AND REISSUANCE OF WARRANTS.

(a)             Registration of Warrant.  The Company shall register this Warrant, upon the records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.  The Company shall also register any transfer, exchange, reissuance or cancellation of any portion of this Warrant in the Warrant Register.

(b)             Transfer of Warrant.  This Warrant may be offered for sale, sold, transferred or assigned without the consent of the Company, except as may otherwise be required by applicable securities laws.  Subject to applicable securities laws, if this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company together with all applicable transfer taxes, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(e)), registered as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and, if less then the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance with Section 7(e)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred.

(c)             Lost, Stolen or Mutilated Warrant.  Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form or the provision of reasonable security by the Holder to the Company and, in the case of mutilation, upon surrender and cancellation of this Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(e)) representing the right to purchase the Warrant Shares then underlying this Warrant.

(d)             Exchangeable for Multiple Warrants.  This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company together with all applicable transfer taxes, for a new Warrant or Warrants (in accordance with Section 7(e)) representing in the aggregate the right to purchase the number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion of such Warrant Shares as is designated by the Holder at the time of such surrender; provided, however, that the Company shall not be required to issue Warrants for fractional shares of Common Stock hereunder.

(e)             Issuance of New Warrants.  Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant shall (i) be of like tenor with this Warrant, (ii) represent, as indicated on the face of such new Warrant, the right to purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 7(b) or Section 7(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this Warrant), (iii) have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date and (iv) have the same rights and conditions as this Warrant.

8.           NOTICES.  Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in accordance with the information set forth in the Warrant Register.  The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Warrant, including, in reasonable detail, a description of such action and the reason or reasons therefore.  Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately upon any adjustment of the Exercise Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the shares of Common Stock, (B) with respect to any grants, issuances or sales of any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation; provided, that in each case, such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

9.           NONCIRCUMVENTION.  The Company hereby covenants and agrees that the Company will not, by amendment of its Amended and Restated Articles of Incorporation, Amended and Restated Bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will at all times in good faith carry out all the provisions of this Warrant and take all action as may be required to protect the rights of the Holder.  Without limiting the generality of the foregoing, the Company (i) shall not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall use all reasonable efforts to take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant and (iii) shall, so long as any of the Warrants are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the exercise of the Warrants, the number of shares of Common Stock as shall from time to time be necessary to effect the exercise of the Warrants then outstanding (without regard to any limitations on exercise).

10.           AMENDMENT AND WAIVER.  Except as otherwise provided herein, the provisions of this Warrant may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Required Holders; provided, that no such action may increase the exercise price of any Warrant or decrease the number of shares or class of stock obtainable upon exercise of any Warrant without the written consent of the Holder.  No such amendment shall be effective to the extent that it applies to less than all of the holders of the Warrants then outstanding.

11.           GOVERNING LAW.  This Warrant shall be governed by and construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed by, the internal laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of California or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of California.

12.           CONSTRUCTION; HEADINGS.  This Warrant shall be deemed to be jointly drafted by the Company and all the Investors and shall not be construed against any person as the drafter hereof.  The headings of this Warrant are for convenience of reference and shall not form part of, or affect the interpretation of, this Warrant.

13.           DISPUTE RESOLUTION.  In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two Trading Days of receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within five Trading Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two Trading Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent, reputable investment bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant.  The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than 10 Trading Days from the time it receives the disputed determinations or calculations.  Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.  The expenses of the investment bank and accountant will be borne by the Company unless the investment bank or accountant determines that the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares by the Holder was incorrect, in which case the expenses of the investment bank and accountant will be borne by the Holder.

14.           REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Warrant shall be cumulative and in addition to all other remedies available under this Warrant and the Subscription Agreements, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual damages for any failure by the Company to comply with the terms of this Warrant.  The Company acknowledges that a breach by it of its obligations hereunder may cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled, in addition to all other available remedies, to seek an injunction restraining any breach.  Notwithstanding the foregoing or anything else herein or in the Subscription Agreements to the contrary, other than as expressly provided in Section 1(c) hereof, if the Company is for any reason unable to issue and deliver Warrant Shares upon exercise of this Warrant as required pursuant to the terms hereof, the Company shall have no obligation to pay to the Holder any cash or other consideration or otherwise “net cash settle” this Warrant.

15.           LIMITATION ON LIABILITY.  No provisions hereof, in the absence of affirmative action by the Holder to purchase Warrant Shares hereunder, shall give rise to any liability of the Holder to pay the Exercise Price or as a shareholder of the Company (whether such liability is asserted by the Company or creditors of the Company).

16.           SUCCESSORS AND ASSIGNS.  This Warrant shall bind and inure to the benefit of and be enforceable by the Company and the Holder and their respective permitted successors and assigns.

17.           FORCED EXERCISE.  In the event that the closing bid price per share of the Common Stock on the Principal Market equals or exceeds 200% of the then-current Exercise Price for any ten (10) Trading Days (which do not have to be consecutive) in a period of fifteen (15) consecutive Trading Days commencing 180 days after the Issuance Date, the Company, upon thirty (30) days prior written notice (the “Notice Period”) given to the Holder within two Trading Days immediately following the end of such fifteen (15) Trading Day period, may demand that the Holder exercise its cash exercise rights hereunder with respect to one-third of the Warrants then held by the Holder (the “Called Warrants”), and the Holder must exercise its rights hereunder prior to the end of the Notice Period; provided that (i) the Company simultaneously gives a similar notice to all holders of the Warrants, (ii) the Registration Statement is in effect and not subject to any stop order or proceeding therefor, has not been suspended and is available for the issuance of the Warrant Shares to the Holder and (iii) the Warrants then held by the Holder are exercisable in at least an amount equal to the Called Warrants.  If such exercise is not made or if only a partial exercise is made, any and all rights to further exercise the Called Warrants shall cease upon the expiration of the Notice Period.  The Company’s right to force the exercise of the Called Warrants pursuant to this Section 17 may only be exercised once.

18.           CERTAIN DEFINITIONS.  For purposes of this Warrant, the following terms shall have the following meanings:

(a)             “Black Scholes Value” means the value of the unexercised portion of this Warrant remaining on the date of the Holder’s request pursuant to Section 4(c), which value is calculated using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the greater of (1) the highest Closing Sale Price of the Common Stock during the period beginning on the Trading Day immediately preceding the earlier to occur of (x) the public disclosure of the applicable Fundamental Transaction or (y) the consummation of the applicable Fundamental Transaction and ending on the Trading Day of the consummation of the Fundamental Transaction and (2) the sum of the price per share being offered in cash in the applicable Fundamental Transaction (if any) plus the value of the non-cash consideration being offered in the applicable Fundamental Transaction (if any), (ii) a strike price equal to the Exercise Price in effect on the date of the Holder’s request pursuant to Section 4(c), (iii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the greater of (1) the remaining term of this Warrant as of the date of the Holder’s request pursuant to Section 4(c) and (2) the remaining term of this Warrant as of the date of consummation of the applicable Fundamental Transaction or as of the date of the Holder’s request pursuant to Section 4(c) if such request is prior to the date of the consummation of the applicable Fundamental Transaction and (iv) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg (determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the public disclosure of the applicable Fundamental Transaction.

(b)             “Bloomberg” means Bloomberg LP.

(c)             “Common Stock” means (i) the Company’s shares of Common Stock, $0.01 par value per share, and (ii) any share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such Common Stock.

(d)            “Common Stock Equivalents” means any securities of the Company or any subsidiary which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

(e)             “Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for shares of Common Stock.

(f)             “Eligible Market” means The New York Stock Exchange, Inc., the NYSE Amex LLC or The Nasdaq Stock Market.

(g)      “Exempt Issuance” means the issuance of (a) shares of Common Stock or stock awards such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights and stock appreciation rights to employees, officers, directors, scientific advisors or outside consultants (provided issuances to consultants shall not exceed 500,000 shares in any 12-month period, subject to adjustment for reverse and forward stock splits and the like) of the Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose for services rendered to the Company, (b) securities upon the exercise or exchange of or conversion of this Warrant and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Warrant, provided that such securities have not been amended after the date of this Warrant to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a Person (or to the equityholders of a Person) which is, itself or through its subsidiaries, an operating company, a private equity fund or an owner of an asset in a business synergistic with the business of the Company and shall, in the case of a strategic transaction, provide to the Company other additional benefits in addition to the investment of funds as deemed reasonably appropriate by the Company, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or, in the case of a strategic transaction, to an entity whose primary business is investing in securities.

(h)             “Expiration Date” means March 6, 2020.

(i)             “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or more related transactions, (i) consolidate or merge with or into another Person, (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, (iii) allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than 50% of either the outstanding shares of Common Stock (not including any shares of Common Stock held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), (iv) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), (v) reorganize, recapitalize or reclassify its Common Stock or (vi) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Common Stock.

(j)             “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

(k)             “Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

(l)             “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

(m)             “Principal Market” means the NYSE Amex LLC.

(n)             “Required Holders” means the holders of the Warrants representing at least a majority of shares of Common Stock underlying the Warrants then outstanding.

(o)             “Successor Entity” means the Person (or, if so elected by the Required Holders, the Parent Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Required Holders, the Parent Entity) with which such Fundamental Transaction shall have been entered into.

(p)             “Trading Day” means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).

(q)             “Weighted Average Price” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange on which the Common Stock is then traded, during the period beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as reported by Bloomberg through its “Volume at Price” function or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by OTC Markets Inc..  If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Required Holders.  If the Company and the Required Holders are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 12 with the term “Weighted Average Price” being substituted for the term “Exercise Price.”  All such determinations shall be appropriately adjusted for any share dividend, share split or other similar transaction during such period.

[Signature Page Follows]

IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.

NOVABAY PHARMACEUTICALS, INC.
By:
	Name:
	Title:

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

NOVABAY PHARMACEUTICALS, INC.

The undersigned holder hereby exercises the right to purchase _________________ of the shares of Common Stock (“Warrant Shares”) of NovaBay Pharmaceuticals, Inc., a Delaware corporation (the “Company”), evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).  Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

1.           Exercise Price.  The Holder intends that payment of the Exercise Price shall be made as (check one):

□         Cash Exercise under Section 1(a).

□         Cashless Exercise under Section 1(d) (provided the conditions therein are satisfied).

2.           Cash Exercise.  If the Holder has elected a Cash Exercise, the Holder shall pay the sum of $       to the Company in accordance with the terms of the Warrant.

3.           Delivery of Warrant Shares.  The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant.

4.           Representations and Warranties.  By its delivery of this Exercise Notice, the undersigned represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of shares of Common Stock (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended) permitted to be owned under Section 1(e) of this Warrant to which this notice relates.

Date: _______________ __, ______

_________________________________

Name of Registered Holder

By: ______________________________

Name:

Title:

ACKNOWLEDGMENT

The Company hereby acknowledges this Exercise Notice.

NOVABAY PHARMACEUTICALS, INC.
By:
	Name:
	Title:

EX-4.2

Exhibit 4.2

NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT (COLLECTIVELY, THE “SECURITIES”), HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES OR BLUE SKY LAWS, PURSUANT TO REGISTRATION OR QUALIFICATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE COMPANY MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY PROPOSED TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. THIS WARRANT IS SUBJECT TO THE TRANSFER RESTRICTIONS SET FORTH HEREIN AND IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF MARCH 3, 2015, AND AS AMENDED FROM TIME TO TIME, COPIES OF WHICH ARE AVAILABLE WITH THE SECRETARY OF THE COMPANY.

NOVABAY PHARMACEUTICALS, INC. 

WARRANT TO PURCHASE COMMON STOCK

Warrant No.: 2015-_____

Number of Shares of Common Stock:  [INSERT 100% OF NO. OF SHARES PURCHASED] _____

Date of Issuance: March 6, 2015 (“Issuance Date”)

NovaBay Pharmaceuticals, Inc., a Delaware corporation (the “Company”), certifies that, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, _____, the registered holder hereof or its permitted assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price (as defined below) then in effect, upon surrender of this Warrant to Purchase Common Stock (including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement hereof, the “Warrant”), at any time or times on or after September 6, 2015 (the “Exercisability Date”), but not after 5:30 p.m., New York Time, on the Expiration Date (as defined below), _____ (_____) fully paid and nonassessable shares of Common Stock (as defined below) (the “Warrant Shares”).   This Warrant is one of a series of warrants to purchase shares of Common Stock (collectively, the “Warrants”) issued on March 6, 2015 (the “Issuance Date”), pursuant to that certain Securities Purchase Agreement by and between the Company and the Holder and certain other Purchasers (the “Purchase Agreement”) dated March 3, 2015. In addition to the defined terms set forth in Section 14 herein, capitalized terms that are not otherwise defined herein shall have the meanings assigned to such terms in the Purchase Agreement.  

1.             EXERCISE OF WARRANT.

(a)           Mechanics of Exercise.  Subject to the terms and conditions hereof (including, without limitation, the limitations set forth in Section 1(f)), this Warrant may be exercised by the Holder on any day on or after the Exercisability Date, in whole or in part (but not as to fractional shares), by (i) delivery of a written notice, in the form attached hereto as Exhibit A (the “Exercise Notice”), of the Holder’s election to exercise this Warrant and (ii) payment to the Company of an amount equal to the applicable Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the “Aggregate Exercise Price”) in cash or wire transfer of immediately available funds (a “Cash Exercise”) (the items under (i) and (ii) above, the “Exercise Delivery Documents”).  The Holder shall not be required to surrender this Warrant in order to effect an exercise hereunder; provided, however, that in the event that this Warrant is exercised in full or for the remaining unexercised portion hereof, the Holder shall deliver this Warrant to the Company for cancellation within a reasonable time after such exercise.  On or before the first Trading Day following the date on which the Company has received the Exercise Delivery Documents (the date upon which the Company has received all of the Exercise Delivery Documents, the “Exercise Date”), the Company shall transmit by facsimile or e-mail transmission an acknowledgment of confirmation of receipt of the Exercise Delivery Documents to the Holder and the Company’s transfer agent for the Common Stock (the “Transfer Agent”). The Company shall deliver any objection to the Exercise Delivery Documents on or before the second Trading Day following the date on which the Company has received all of the Exercise Delivery Documents.  On or before the third Trading Day following the date on which the Company has received all of the Exercise Delivery Documents (the “Share Delivery Date”), the Company shall cause the Transfer Agent to credit the account of the Purchaser’s prime broker with the Depository Trust Company System (as directed by such Purchaser) with the number of Warrant Shares to which the Holder is entitled pursuant to such exercise.  Upon delivery of the Exercise Notice, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares to such Holders’ prime broker account with the Depository Trust Company System.  If this Warrant is submitted in connection with any exercise pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than the number of Warrant Shares being acquired upon an exercise, then the Company shall as soon as practicable and in no event later than three Trading Days after any such submission and at its own expense, issue a new Warrant (in accordance with Section 7(e)) representing the right to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant, less the number of Warrant Shares with respect to which this Warrant has been and/or is exercised.  The Company shall pay any and all taxes and other expenses of the Company (including overnight delivery charges) that may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrants in a name other than that of the Holder or an affiliate thereof.  The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

(b)           Exercise Price.  For purposes of this Warrant, “Exercise Price” means $1.81 per share of Common Stock, subject to adjustment as provided herein.

(c)           Failure to Timely Deliver Shares. In addition to any other rights available to a Holder, if the Company fails to deliver to the Holder Warrant Shares by the third Trading Day after the Exercise Date, and if after such third Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within three Trading Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased less the Exercise Price (the “Buy-In Price”), at which point the Company’s obligation to deliver such Warrant Shares shall terminate, or (ii) promptly honor its obligation to deliver to the Holder such Warrant Shares and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Sale Price on the date of the event giving rise to the Company’s obligation to deliver such certificate.

(d)           Cashless Exercise. Notwithstanding anything contained herein to the contrary, the Holder may, in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (a “Cashless Exercise”):

Net Number = (A x B) - (A x C)
B
For purposes of the foregoing formula:
A =	the total number of shares with respect to which this Warrant is then being exercised.
B =	the Weighted Average Price of the shares of Common Stock (as reported by Bloomberg) on the date immediately preceding the date of the Exercise Notice.
C =	the Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

For purposes of Rule 144(d) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), as in effect on the date hereof, assuming the Holder is not an affiliate of the Company, it is intended that the Warrant Shares issued in a Cashless Exercise shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the closing date of the offering pursuant to which the Company was obligated to issue this Warrant.

(e)           Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the number of Warrant Shares to be issued pursuant to the terms hereof, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and resolve such dispute in accordance with Section 13.

(f)           Limitations on Exercises.  (1)  The Company shall not effect the exercise of this Warrant, and the Holder shall not have the right to exercise this Warrant, to the extent that after giving effect to such exercise, such Holder (together with such Holder’s affiliates and any other Persons acting as a group together) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such exercise.  For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Person and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by such Person and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Person and its affiliates (including, without limitation, any convertible notes or convertible preferred stock or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein.  Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), it being acknowledged that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act, and the Holder is solely responsible for any schedules required to be filed in accordance therewith. For purposes of this Warrant, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q, Current Report on Form 8-K or other public filing with the Securities and Exchange Commission, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  For any reason at any time, upon the written or oral request of the Holder, where such request indicates that it is being made pursuant to this Warrant, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including the Warrants, by the Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  By written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any other percentage specified in such notice; provided, that (i) any such increase will not be effective until the 61st day after such notice is delivered to the Company and (ii) any such increase or decrease will apply only to the Holder and not to any other holder of Warrants. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1(f) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.

(g)           No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share that the Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price.

(h)  Forced Exercise by the Company. The Company may force the Holder to exercise this Warrant, in whole or in part (such whole or part, the “Called Warrant”), at any time all of the Exercise Conditions are satisfied. Provided the Exercise Conditions have all been satisfied, the Company may provide notice (the “Company Conversion Notice”) to the Holder at any time within seven (7) Business Days after any date upon which the Exercise Conditions are satisfied indicating the Company’s exercise of its right to have the Called Warrant exercised. The Holder shall have fifteen (15) Business Days after receipt of such Company Conversion Notice (the “Notice Period”) to exercise the Called Warrant by delivering the Warrant and either (1) the payment of the Aggregate Exercise Price as provided in Section 1(a) above or (2) through a Cashless Exercise as provided in Section 1(d) above (the Warrant, the exercise notice and, if applicable, the Aggregate Exercise Price, referred to as the “Forced Exercise Deliveries”). Upon receipt of the Forced Exercise Deliveries, the Company shall promptly deliver the Warrant Shares issued on exercise of the Called Warrant (and, if the Called Warrant is with respect to fewer shares than the Warrant, a warrant for the remainder of such shares not so called containing the same provisions of this Warrant, including this Section 1(h)) to the Holder. If delivery of the Forced Exercise Deliveries is not made during the Notice Period, or if only a partial exercise is made during the Notice Period, any and all rights of the Holder to further exercise the Called Warrant shall cease, and the Called Warrant shall terminate, upon the expiration of the Notice Period.

2.            ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.  The Exercise Price and the number of Warrant Shares shall be adjusted from time to time as follows:

(a)           Adjustment upon Subdivision or Combination of Shares of Common Stock.  If the Company at any time on or after the Issuance Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Warrant Shares will be proportionately increased.  If the Company at any time on or after the Issuance Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares will be proportionately decreased.  Any adjustment under this Section 2(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(b)           Subsequent Equity Sales. If the Company or any subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents, at an effective price per share less than the Exercise Price then in effect (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price), then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to equal the Base Share Price. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 2(b) in respect of an Exempt Issuance. The Company shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance of any Common Stock or Common Stock Equivalents subject to this Section 2(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 2(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Exercise Notice.

(c)           Other Events.  If any event occurs of the type contemplated by the provisions of Section 2(a) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features to the holders of the Company’s equity securities), then the Company’s Board of Directors will make an appropriate adjustment in the Exercise Price and the number of Warrant Shares so as to protect the rights of the Holder; provided, that no such adjustment pursuant to this Section 2(c) will increase the Exercise Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2.

(d)           Notwithstanding anything to the contrary in this Warrant, in no event shall the Exercise Price be reduced below the par value of the Company’s Common Stock

3.            RIGHTS UPON DISTRIBUTION OF ASSETS.  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case:

(a)           any Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Exercise Price by a fraction of which (i) the numerator shall be the Weighted Average Price of the shares of Common Stock on the Trading Day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (ii) the denominator shall be the Weighted Average Price of the shares of Common Stock on the Trading Day immediately preceding such record date; and

(b)           the number of Warrant Shares shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding paragraph (a); provided, that in the event that the Distribution is of shares of Common Stock or common stock of a company whose common shares are traded on a national securities exchange or a national automated quotation system (“Other Shares of Common Stock”), then the Holder may elect to receive a warrant to purchase Other Shares of Common Stock in lieu of an increase in the number of Warrant Shares, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the number of shares of Other Shares of Common Stock that would have been payable to the Holder pursuant to the Distribution had the Holder exercised this Warrant immediately prior to such record date and with an aggregate exercise price equal to the product of the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding paragraph (a) and the number of Warrant Shares calculated in accordance with the first part of this paragraph (b).

4.             PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

(a)           Purchase Rights.  In addition to any adjustments pursuant to Section 2 above, if at any time prior to the Expiration Date the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, that to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Maximum Percentage, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Maximum Percentage, at which time the Holder shall be granted such right to the same extent as if there had been no such limitation).

(b)           Fundamental Transactions.  Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.  Upon consummation of the Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon exercise of this Warrant at any time after the consummation of the Fundamental Transaction, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property purchasable upon the exercise of the Warrant prior to such Fundamental Transaction), such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights), if any, that the Holder would have been entitled to receive upon the happening of such Fundamental Transaction had this Warrant been exercised immediately prior to such Fundamental Transaction, as adjusted in accordance with the provisions of this Warrant.  In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to ensure that the Holder will thereafter have the right to receive upon an exercise of this Warrant within 90 days after the consummation of the Fundamental Transaction but, in any event, prior to the Expiration Date, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property) purchasable upon the exercise of the Warrant prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights) which the Holder would have been entitled to receive upon the happening of such Fundamental Transaction had the Warrant been exercised immediately prior to such Fundamental Transaction and shall be applied without regard to any limitations on the exercise of this Warrant.  Provision made pursuant to the preceding sentence shall be in a form and substance reasonably satisfactory to the Required Holders.  The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and Corporate Events and shall be applied without regard to any limitations on the exercise of this Warrant.

5.            RESERVATION OF WARRANT SHARES.  The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of shares of Common Stock which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive or any other contingent purchase rights of Persons other than the Holder (taking into account the adjustments and restrictions in Section 2).  Such reservation shall comply with the provisions of Section 1.  The Company covenants that all shares of Common Stock so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable.  The Company will take all such actions as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed. If, notwithstanding the foregoing, and not in limitation thereof, at any time while this Warrant remains outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon exercise of this Warrant at least a number of shares of Common Stock equal to the maximum number of shares of Common Stock as shall from time to time be necessary to effect the exercise of all this Warrant (without regard to any limitations on exercise contained herein) (the “Required Reserve Amount”) (an “Authorized Share Failure”), then the Company shall immediately take all action necessary to increase the Company’s authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount for this entire Warrant. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than sixty (60) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal.

6.            WARRANT HOLDER NOT DEEMED A STOCKHOLDER.  Except as otherwise specifically provided herein, the Holder, solely in such Person’s capacity as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Person’s capacity as the Holder of this Warrant, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.

7.            REGISTRATION AND REISSUANCE OF WARRANTS.

(a)           Registration of Warrant.  The Company shall register this Warrant, upon the records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.  The Company shall also register any transfer, exchange, reissuance or cancellation of any portion of this Warrant in the Warrant Register.

(b)           Transfer of Warrant.  This Warrant may be offered for sale, sold, transferred or assigned without the consent of the Company, except as may otherwise be required by applicable securities laws.  Subject to applicable securities laws, if this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company together with all applicable transfer taxes, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(e)), registered as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and, if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance with Section 7(e)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred.

(c)           Lost, Stolen or Mutilated Warrant.  Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form or the provision of reasonable security by the Holder to the Company and, in the case of mutilation, upon surrender and cancellation of this Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(e)) representing the right to purchase the Warrant Shares then underlying this Warrant.

(d)           Exchangeable for Multiple Warrants.  This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company together with all applicable transfer taxes, for a new Warrant or Warrants (in accordance with Section 7(e)) representing in the aggregate the right to purchase the number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion of such Warrant Shares as is designated by the Holder at the time of such surrender; provided, however, that the Company shall not be required to issue Warrants for fractional shares of Common Stock hereunder.

(e)           Issuance of New Warrants.  Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant shall (i) be of like tenor with this Warrant, (ii) represent, as indicated on the face of such new Warrant, the right to purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 7(b) or Section 7(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this Warrant), (iii) have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date and (iv) have the same rights and conditions as this Warrant.

8.            NOTICES.  Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in accordance with the information set forth in the Warrant Register.  The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Warrant, including, in reasonable detail, a description of such action and the reason or reasons therefore.  Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately upon any adjustment of the Exercise Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the shares of Common Stock, (B) with respect to any grants, issuances or sales of any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation; provided, that in each case, such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

9.            NONCIRCUMVENTION.  The Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation, Bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will at all times in good faith carry out all the provisions of this Warrant and take all action as may be required to protect the rights of the Holder.  Without limiting the generality of the foregoing, the Company (i) shall not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall use all reasonable efforts to take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant and (iii) shall, so long as any of the Warrants are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the exercise of the Warrants, the number of shares of Common Stock as shall from time to time be necessary to effect the exercise of the Warrants then outstanding (without regard to any limitations on exercise).

10.           AMENDMENT AND WAIVER.  Except as otherwise provided herein, the provisions of this Warrant may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Holder.  No such amendment shall be effective to the extent that it applies to less than all of the holders of the Warrants then outstanding.

11.           GOVERNING LAW.  This Warrant shall be governed by and construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.

12.           CONSTRUCTION; HEADINGS.  This Warrant shall be deemed to be jointly drafted by the Company and all the Investors and shall not be construed against any person as the drafter hereof.  The headings of this Warrant are for convenience of reference and shall not form part of, or affect the interpretation of, this Warrant.

13.           DISPUTE RESOLUTION.  In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two Trading Days of receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within five Trading Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two Trading Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent, reputable investment bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant.  The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than 10 Trading Days from the time it receives the disputed determinations or calculations.  Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.  The expenses of the investment bank and accountant will be borne by the Company unless the investment bank or accountant determines that the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares by the Holder was incorrect, in which case the expenses of the investment bank and accountant will be borne by the Holder.

14.           REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Warrant shall be cumulative and in addition to all other remedies available under this Warrant, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual damages for any failure by the Company to comply with the terms of this Warrant.  The Company acknowledges that a breach by it of its obligations hereunder may cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled, in addition to all other available remedies, to seek an injunction restraining any breach.  Notwithstanding the foregoing or anything else herein to the contrary, other than as expressly provided in Section 1(c) hereof, if the Company is for any reason unable to issue and deliver Warrant Shares upon exercise of this Warrant as required pursuant to the terms hereof, the Company shall have no obligation to pay to the Holder any cash or other consideration or otherwise “net cash settle” this Warrant.

15.          LIMITATION ON LIABILITY.  No provisions hereof, in the absence of affirmative action by the Holder to purchase Warrant Shares hereunder, shall give rise to any liability of the Holder to pay the Exercise Price or as a shareholder of the Company (whether such liability is asserted by the Company or creditors of the Company).

16.           SUCCESSORS AND ASSIGNS.  This Warrant shall bind and inure to the benefit of and be enforceable by the Company and the Holder and their respective permitted successors and assigns.

17.           CERTAIN DEFINITIONS.  For purposes of this Warrant, the following terms shall have the following meanings:

(a)           “Bloomberg” means Bloomberg LP.

(b)           “Closing Sale Price” means, for any security as of any date, the last closing trade price for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing trade price, then the last trade price of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last trade price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last trade price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last trade price is reported for such security by Bloomberg, the average of the ask prices of any market makers for such security as reported in the “pink sheets” by OTC Markets Inc. If the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 13. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.

(c)           “Common Stock” means (i) the Company’s shares of Common Stock, $0.01 par value per share, and (ii) any share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such Common Stock.

(d)          “Common Stock Equivalents” means any securities of the Company or any subsidiary which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

(e)           “Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for shares of Common Stock.

(f)            “Eligible Market” means The New York Stock Exchange, Inc., the NYSE MKT or The Nasdaq Stock Market.

(g)          “Exempt Issuance” means the issuance of (a) shares of Common Stock or stock awards such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights and stock appreciation rights to employees, officers, directors, scientific advisors or outside consultants (provided issuances to consultants shall not exceed 500,000 shares in any 12-month period, subject to adjustment for reverse and forward stock splits and the like) of the Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose for services rendered to the Company, (b) securities upon the exercise or exchange of or conversion of this Warrant and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Warrant, provided that such securities have not been amended after the date of this Warrant to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a Person (or to the equityholders of a Person) which is, itself or through its subsidiaries, an operating company, a private equity fund or an owner of an asset in a business synergistic with the business of the Company and shall, in the case of a strategic transaction, provide to the Company other additional benefits in addition to the investment of funds as deemed reasonably appropriate by the Company, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or, in the case of a strategic transaction, to an entity whose primary business is investing in securities. 

(h)           “Exercise Conditions” means on or after the Exercisability Date, the Closing Sale Price per share of the Common Stock is greater than or equal to one dollar ($1.00) (as adjusted for splits, recapitalization and the like) for a period of ten (10) out of twenty (20) consecutive Trading Days following the date that is six months after the closing date of the offering pursuant to which the Company was obligated to issue this Warrant, provided, however, that:

i)     during the twenty (20) Trading Day period referred to in this Section 17(f), the Common Stock must trade at an average dollar-volume of at least $50,000 per Trading Day; and

ii)     either:

1.     a Registration Statement (as defined in that certain Registration Rights Agreement, dated as of the hereof, between the Company, the Holder and the other signatories thereto (the “RRA”)) or Registration Statements covering all of the Registrable Securities (as defined in the RRA) shall have been filed with and declared effective under the Securities Act by the U.S. Securities and Exchange Commission and shall have remained continuously effective under the Securities Act during the entire twenty (20) consecutive Trading Day period referred to in this Section 17(f); or

2.     the Holder shall have been permitted to sell all of the Registrable Securities held by such Holder pursuant to Rule 144 under the Securities Act during the entire twenty (20) consecutive Trading Day period referred to in this Section 17(f).

(i)      “Expiration Date” means the date 60 months after the Issuance Date or, if such date falls on a day other than a Trading Day or on which trading does not take place on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded (a “Holiday”), the next date that is not a Holiday.

(j)           “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or more related transactions, (i) consolidate or merge with or into another Person, (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, (iii) allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than 50% of either the outstanding shares of Common Stock (not including any shares of Common Stock held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), (iv) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), (v) reorganize, recapitalize or reclassify its Common Stock or (vi) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Common Stock.

(k)           “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

(l)           “Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

(m)           “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

(n)           “Principal Market” means the NYSE MKT.

(o)           “Required Holders” means the holders of the Warrants representing at least a majority of shares of Common Stock underlying the Warrants then outstanding.

(p)           “Successor Entity” means the Person (or, if so elected by the Required Holders, the Parent Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Required Holders, the Parent Entity) with which such Fundamental Transaction shall have been entered into.

(q)           “Trading Day” means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).

(r)           “Weighted Average Price” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange on which the Common Stock is then traded, during the period beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as reported by Bloomberg through its “Volume at Price” function or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by OTC Markets Inc.  If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Required Holders.  If the Company and the Required Holders are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 12 with the term “Weighted Average Price” being substituted for the term “Exercise Price.”  All such determinations shall be appropriately adjusted for any share dividend, share split or other similar transaction during such period.

[Signature Page Follows]

IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.

NOVABAY PHARMACEUTICALS, INC.
By:
	Name:
	Title:

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

NOVABAY PHARMACEUTICALS, INC.

The undersigned holder hereby exercises the right to purchase _________________ of the shares of Common Stock (“Warrant Shares”) of NovaBay Pharmaceuticals, Inc., a Delaware corporation (the “Company”), evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).  Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

1.             Exercise Price.  The Holder intends that payment of the Exercise Price shall be made as (check one):

□           Cash Exercise under Section 1(a).

□           Cashless Exercise under Section 1(d) (provided the conditions therein are satisfied).

2.             Cash Exercise.  If the Holder has elected a Cash Exercise, the Holder shall pay the sum of $            to the Company in accordance with the terms of the Warrant.

3.            Delivery of Warrant Shares.  The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant. If the shares are to be delivered electronically, please complete the Depository Trust Company (“DTC”) DWAC information below.

4.            Representations and Warranties.  By its delivery of this Exercise Notice, the undersigned represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of shares of Common Stock (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended) permitted to be owned under Section 1(f) of this Warrant to which this notice relates.

Date: _______________ __, ______

Name of Registered Holder		Name of Signatory
By:
	Name:
	Title :

If shares are to be delivered electronically:

Broker Name: ________________________________

Broker DTC DWAC #: ________________________________

Account at Broker shares are to be delivered to: ________________________________

ACKNOWLEDGMENT

The Company hereby acknowledges this Exercise Notice.

NOVABAY PHARMACEUTICALS, INC.
By:
	Name:
	Title:

EX-4.3

Exhibit 4.3

NEITHER THIS WARRANT, NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT (COLLECTIVELY, THE “SECURITIES”), HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES OR BLUE SKY LAWS, PURSUANT TO REGISTRATION OR QUALIFICATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE COMPANY MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY PROPOSED TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. THIS WARRANT IS SUBJECT TO THE TRANSFER RESTRICTIONS SET FORTH HEREIN AND IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF MARCH 3, 2015, AND AS AMENDED FROM TIME TO TIME, COPIES OF WHICH ARE AVAILABLE WITH THE SECRETARY OF THE COMPANY. 

NOVABAY PHARMACEUTICALS, INC. 

WARRANT TO PURCHASE COMMON STOCK

Warrant No.: 2015-_____

Number of Shares of Common Stock:  [[INSERT 75% OF NO. OF SHARES PURCHASED] _____

Date of Issuance: March 6, 2015 (“Issuance Date”)

NovaBay Pharmaceuticals, Inc., a Delaware corporation (the “Company”), certifies that, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, _____, the registered holder hereof or its permitted assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price (as defined below) then in effect, upon surrender of this Warrant to Purchase Common Stock (including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement hereof, the “Warrant”), at any time or times on or after September 6, 2015 (the “Exercisability Date”), but not after 5:30 p.m., New York Time, on the Expiration Date (as defined below), _____ (_____) fully paid and nonassessable shares of Common Stock (as defined below) (the “Warrant Shares”).   This Warrant is one of a series of warrants to purchase shares of Common Stock (collectively, the “Warrants”) issued on March 6, 2015 (the “Issuance Date”), pursuant to that certain Securities Purchase Agreement by and between the Company and the Holder and certain other Purchasers (the “Purchase Agreement”) dated March 3, 2015. In addition to the defined terms set forth in Section 14 herein, capitalized terms that are not otherwise defined herein shall have the meanings assigned to such terms in the Purchase Agreement.  

1.             EXERCISE OF WARRANT.

(a)           Mechanics of Exercise.  Subject to the terms and conditions hereof (including, without limitation, the limitations set forth in Section 1(f)), this Warrant may be exercised by the Holder on any day on or after the Exercisability Date, in whole or in part (but not as to fractional shares), by (i) delivery of a written notice, in the form attached hereto as Exhibit A (the “Exercise Notice”), of the Holder’s election to exercise this Warrant and (ii) payment to the Company of an amount equal to the applicable Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the “Aggregate Exercise Price”) in cash or wire transfer of immediately available funds (a “Cash Exercise”) (the items under (i) and (ii) above, the “Exercise Delivery Documents”).  The Holder shall not be required to surrender this Warrant in order to effect an exercise hereunder; provided, however, that in the event that this Warrant is exercised in full or for the remaining unexercised portion hereof, the Holder shall deliver this Warrant to the Company for cancellation within a reasonable time after such exercise.  On or before the first Trading Day following the date on which the Company has received the Exercise Delivery Documents (the date upon which the Company has received all of the Exercise Delivery Documents, the “Exercise Date”), the Company shall transmit by facsimile or e-mail transmission an acknowledgment of confirmation of receipt of the Exercise Delivery Documents to the Holder and the Company’s transfer agent for the Common Stock (the “Transfer Agent”). The Company shall deliver any objection to the Exercise Delivery Documents on or before the second Trading Day following the date on which the Company has received all of the Exercise Delivery Documents.  On or before the third Trading Day following the date on which the Company has received all of the Exercise Delivery Documents (the “Share Delivery Date”), the Company shall cause the Transfer Agent to credit the account of the Purchaser’s prime broker with the Depository Trust Company System (as directed by such Purchaser) with the number of Warrant Shares to which the Holder is entitled. Upon delivery of the Exercise Notice, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares to such Holder’s prime broker account with the Depository Trust Company System.  If this Warrant is submitted in connection with any exercise pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than the number of Warrant Shares being acquired upon an exercise, then the Company shall as soon as practicable and in no event later than three Trading Days after any such submission and at its own expense, issue a new Warrant (in accordance with Section 7(e)) representing the right to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant, less the number of Warrant Shares with respect to which this Warrant has been and/or is exercised.  The Company shall pay any and all taxes and other expenses of the Company (including overnight delivery charges) that may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrants in a name other than that of the Holder or an affiliate thereof.  The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

(b)           Exercise Price.  For purposes of this Warrant, “Exercise Price” means $1.81 per share of Common Stock, subject to adjustment as provided herein.

(c)           Failure to Timely Deliver Shares. In addition to any other rights available to a Holder, if the Company fails to deliver to the Holder Warrant Shares by the third Trading Day after the Exercise Date, and if after such third Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within three Trading Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased less the Exercise Price (the “Buy-In Price”), at which point the Company’s obligation to deliver such Warrant Shares shall terminate, or (ii) promptly honor its obligation to deliver to the Holder such Warrant Shares and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Price on the date of the event giving rise to the Company’s obligation to deliver such Warrant Shares.

(d)           Cashless Exercise. Notwithstanding anything contained herein to the contrary, but only if a Registration Statement with respect to the Warrant Shares is not effective, the Holder may, in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (a “Cashless Exercise”):

Net Number = (A x B) - (A x C)
B
For purposes of the foregoing formula:
A =	the total number of shares with respect to which this Warrant is then being exercised.
B =	the Weighted Average Price of the shares of Common Stock (as reported by Bloomberg) on the date immediately preceding the date of the Exercise Notice.
C =	the Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

For purposes of Rule 144(d) promulgated under the Securities Act of 1933, as amended, as in effect on the date hereof, assuming the Holder is not an affiliate of the Company, it is intended that the Warrant Shares issued in a Cashless Exercise shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the closing date of the offering pursuant to which the Company was obligated to issue this Warrant.

(e)           Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the number of Warrant Shares to be issued pursuant to the terms hereof, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and resolve such dispute in accordance with Section 13.

(f)           Limitations on Exercises.  (1)  The Company shall not effect the exercise of this Warrant, and the Holder shall not have the right to exercise this Warrant, to the extent that after giving effect to such exercise, such Holder (together with such Holder’s affiliates and any other Persons acting as a group together) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such exercise.  For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Person and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by such Person and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Person and its affiliates (including, without limitation, any convertible notes or convertible preferred stock or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein.  Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), it being acknowledged that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act, and the Holder is solely responsible for any schedules required to be filed in accordance therewith. For purposes of this Warrant, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q, Current Report on Form 8-K or other public filing with the Securities and Exchange Commission, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  For any reason at any time, upon the written or oral request of the Holder, where such request indicates that it is being made pursuant to this Warrant, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including the Warrants, by the Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  By written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any other percentage specified in such notice; provided, that (i) any such increase will not be effective until the 61st day after such notice is delivered to the Company and (ii) any such increase or decrease will apply only to the Holder and not to any other holder of Warrants. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1(f) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.

(g)           No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share that the Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price.

2.            ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.  The Exercise Price and the number of Warrant Shares shall be adjusted from time to time as follows:

(a)           Adjustment upon Subdivision or Combination of Shares of Common Stock.  If the Company at any time on or after the Issuance Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Warrant Shares will be proportionately increased.  If the Company at any time on or after the Issuance Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares will be proportionately decreased.  Any adjustment under this Section 2(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(b)     Subsequent Equity Sales. If the Company or any subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents, at an effective price per share less than the Exercise Price then in effect (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price), then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to equal the Base Share Price. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 2(b) in respect of an Exempt Issuance. The Company shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance of any Common Stock or Common Stock Equivalents subject to this Section 2(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 2(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Exercise Notice.

(c)           Other Events.  If any event occurs of the type contemplated by the provisions of Section 2(a) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features to the holders of the Company’s equity securities), then the Company’s Board of Directors will make an appropriate adjustment in the Exercise Price and the number of Warrant Shares so as to protect the rights of the Holder; provided, that no such adjustment pursuant to this Section 2(c) will increase the Exercise Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2.

(d)           Notwithstanding anything to the contrary in this Warrant, in no event shall the Exercise Price be reduced below the par value of the Company’s Common Stock

3.            RIGHTS UPON DISTRIBUTION OF ASSETS.  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case:

(a)           any Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Exercise Price by a fraction of which (i) the numerator shall be the Weighted Average Price of the shares of Common Stock on the Trading Day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (ii) the denominator shall be the Weighted Average Price of the shares of Common Stock on the Trading Day immediately preceding such record date; and

(b)           the number of Warrant Shares shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding paragraph (a); provided, that in the event that the Distribution is of shares of Common Stock or common stock of a company whose common shares are traded on a national securities exchange or a national automated quotation system (“Other Shares of Common Stock”), then the Holder may elect to receive a warrant to purchase Other Shares of Common Stock in lieu of an increase in the number of Warrant Shares, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the number of shares of Other Shares of Common Stock that would have been payable to the Holder pursuant to the Distribution had the Holder exercised this Warrant immediately prior to such record date and with an aggregate exercise price equal to the product of the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding paragraph (a) and the number of Warrant Shares calculated in accordance with the first part of this paragraph (b).

4.             PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

(a)           Purchase Rights.  In addition to any adjustments pursuant to Section 2 above, if at any time prior to the Expiration Date the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, that to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Maximum Percentage, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Maximum Percentage, at which time the Holder shall be granted such right to the same extent as if there had been no such limitation).

(b)           Fundamental Transactions.  Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.  Upon consummation of the Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon exercise of this Warrant at any time after the consummation of the Fundamental Transaction, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property purchasable upon the exercise of the Warrant prior to such Fundamental Transaction), such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights), if any, that the Holder would have been entitled to receive upon the happening of such Fundamental Transaction had this Warrant been exercised immediately prior to such Fundamental Transaction, as adjusted in accordance with the provisions of this Warrant.  In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to ensure that the Holder will thereafter have the right to receive upon an exercise of this Warrant within 90 days after the consummation of the Fundamental Transaction but, in any event, prior to the Expiration Date, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property) purchasable upon the exercise of the Warrant prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights) which the Holder would have been entitled to receive upon the happening of such Fundamental Transaction had the Warrant been exercised immediately prior to such Fundamental Transaction and shall be applied without regard to any limitations on the exercise of this Warrant.  Provision made pursuant to the preceding sentence shall be in a form and substance reasonably satisfactory to the Required Holders.  The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and Corporate Events and shall be applied without regard to any limitations on the exercise of this Warrant.

5.            RESERVATION OF WARRANT SHARES.  The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of shares of Common Stock which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive or any other contingent purchase rights of Persons other than the Holder (taking into account the adjustments and restrictions in Section 2).  Such reservation shall comply with the provisions of Section 1.  The Company covenants that all shares of Common Stock so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable.  The Company will take all such actions as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed. If, notwithstanding the foregoing, and not in limitation thereof, at any time while this Warrant remains outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon exercise of this Warrant at least a number of shares of Common Stock equal to the maximum number of shares of Common Stock as shall from time to time be necessary to effect the exercise of all this Warrant (without regard to any limitations on exercise contained herein) (the “Required Reserve Amount”) (an “Authorized Share Failure”), then the Company shall immediately take all action necessary to increase the Company’s authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount for this entire Warrant. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than sixty (60) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal.

6.           WARRANT HOLDER NOT DEEMED A STOCKHOLDER.  Except as otherwise specifically provided herein, the Holder, solely in such Person’s capacity as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Person’s capacity as the Holder of this Warrant, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.

7.            REGISTRATION AND REISSUANCE OF WARRANTS.

(a)           Registration of Warrant.  The Company shall register this Warrant, upon the records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.  The Company shall also register any transfer, exchange, reissuance or cancellation of any portion of this Warrant in the Warrant Register.

(b)           Transfer of Warrant.  This Warrant may be offered for sale, sold, transferred or assigned without the consent of the Company, except as may otherwise be required by applicable securities laws.  Subject to applicable securities laws, if this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company together with all applicable transfer taxes, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(e)), registered as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and, if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance with Section 7(e)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred.

(c)           Lost, Stolen or Mutilated Warrant.  Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form or the provision of reasonable security by the Holder to the Company and, in the case of mutilation, upon surrender and cancellation of this Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(e)) representing the right to purchase the Warrant Shares then underlying this Warrant.

(d)           Exchangeable for Multiple Warrants.  This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company together with all applicable transfer taxes, for a new Warrant or Warrants (in accordance with Section 7(e)) representing in the aggregate the right to purchase the number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion of such Warrant Shares as is designated by the Holder at the time of such surrender; provided, however, that the Company shall not be required to issue Warrants for fractional shares of Common Stock hereunder.

(e)           Issuance of New Warrants.  Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant shall (i) be of like tenor with this Warrant, (ii) represent, as indicated on the face of such new Warrant, the right to purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 7(b) or Section 7(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this Warrant), (iii) have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date and (iv) have the same rights and conditions as this Warrant.

8.            NOTICES.  Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in accordance with the information set forth in the Warrant Register.  The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Warrant, including, in reasonable detail, a description of such action and the reason or reasons therefore.  Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately upon any adjustment of the Exercise Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least 20 days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the shares of Common Stock, (B) with respect to any grants, issuances or sales of any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation; provided, that in each case, such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

9.            NONCIRCUMVENTION.  The Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation, Bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will at all times in good faith carry out all the provisions of this Warrant and take all action as may be required to protect the rights of the Holder.  Without limiting the generality of the foregoing, the Company (i) shall not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall use all reasonable efforts to take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant and (iii) shall, so long as any of the Warrants are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the exercise of the Warrants, the number of shares of Common Stock as shall from time to time be necessary to effect the exercise of the Warrants then outstanding (without regard to any limitations on exercise).

10.           AMENDMENT AND WAIVER.  Except as otherwise provided herein, the provisions of this Warrant may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Holder.  No such amendment shall be effective to the extent that it applies to less than all of the holders of the Warrants then outstanding.

11.           GOVERNING LAW.  This Warrant shall be governed by and construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.

12.           CONSTRUCTION; HEADINGS.  This Warrant shall be deemed to be jointly drafted by the Company and all the Investors and shall not be construed against any person as the drafter hereof.  The headings of this Warrant are for convenience of reference and shall not form part of, or affect the interpretation of, this Warrant.

13.           DISPUTE RESOLUTION.  In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two Trading Days of receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within five Trading Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two Trading Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent, reputable investment bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant.  The Company shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than 10 Trading Days from the time it receives the disputed determinations or calculations.  Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.  The expenses of the investment bank and accountant will be borne by the Company unless the investment bank or accountant determines that the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares by the Holder was incorrect, in which case the expenses of the investment bank and accountant will be borne by the Holder.

14.           REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Warrant shall be cumulative and in addition to all other remedies available under this Warrant, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual damages for any failure by the Company to comply with the terms of this Warrant.  The Company acknowledges that a breach by it of its obligations hereunder may cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled, in addition to all other available remedies, to seek an injunction restraining any breach.  Notwithstanding the foregoing or anything else herein to the contrary, other than as expressly provided in Section 1(c) hereof, if the Company is for any reason unable to issue and deliver Warrant Shares upon exercise of this Warrant as required pursuant to the terms hereof, the Company shall have no obligation to pay to the Holder any cash or other consideration or otherwise “net cash settle” this Warrant.

15.          LIMITATION ON LIABILITY.  No provisions hereof, in the absence of affirmative action by the Holder to purchase Warrant Shares hereunder, shall give rise to any liability of the Holder to pay the Exercise Price or as a shareholder of the Company (whether such liability is asserted by the Company or creditors of the Company).

16.           SUCCESSORS AND ASSIGNS.  This Warrant shall bind and inure to the benefit of and be enforceable by the Company and the Holder and their respective permitted successors and assigns.

17.           CERTAIN DEFINITIONS.  For purposes of this Warrant, the following terms shall have the following meanings:

(a)           “Bloomberg” means Bloomberg LP.

(b)          “Common Stock” means (i) the Company’s shares of Common Stock, $0.01 par value per share, and (ii) any share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such Common Stock.

(c)          “Common Stock Equivalents” means any securities of the Company or any subsidiary which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

(d)           “Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for shares of Common Stock.

(e)           “Eligible Market” means The New York Stock Exchange, Inc., the NYSE MKT or The Nasdaq Stock Market.

(f)           “Exempt Issuance” means the issuance of (a) shares of Common Stock or stock awards such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights and stock appreciation rights to employees, officers, directors, scientific advisors or outside consultants (provided issuances to consultants shall not exceed 500,000 shares in any 12-month period, subject to adjustment for reverse and forward stock splits and the like) of the Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose for services rendered to the Company, (b) securities upon the exercise or exchange of or conversion of this Warrant and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Warrant, provided that such securities have not been amended after the date of this Warrant to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a Person (or to the equityholders of a Person) which is, itself or through its subsidiaries, an operating company, a private equity fund or an owner of an asset in a business synergistic with the business of the Company and shall, in the case of a strategic transaction, provide to the Company other additional benefits in addition to the investment of funds as deemed reasonably appropriate by the Company, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or, in the case of a strategic transaction, to an entity whose primary business is investing in securities.

(g)           “Expiration Date” means the date that is 60 months after the Issuance Date or, if such date falls on a day other than a Trading Day or on which trading does not take place on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded (a “Holiday”), the next date that is not a Holiday.

(h)          “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or more related transactions, (i) consolidate or merge with or into another Person, (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, (iii) allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than 50% of either the outstanding shares of Common Stock (not including any shares of Common Stock held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), (iv) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), (v) reorganize, recapitalize or reclassify its Common Stock or (vi) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Common Stock.

(i)            “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

(j)            “Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

(k)           “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

(l)            “Principal Market” means the NYSE MKT.

(m)          “Required Holders” means the holders of the Warrants representing at least a majority of shares of Common Stock underlying the Warrants then outstanding.

(n)           “Successor Entity” means the Person (or, if so elected by the Required Holders, the Parent Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Required Holders, the Parent Entity) with which such Fundamental Transaction shall have been entered into.

(o)           “Trading Day” means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).

(p)           “Weighted Average Price” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange on which the Common Stock is then traded, during the period beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as reported by Bloomberg through its “Volume at Price” function or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by OTC Markets Inc..  If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Required Holders.  If the Company and the Required Holders are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 12 with the term “Weighted Average Price” being substituted for the term “Exercise Price.”  All such determinations shall be appropriately adjusted for any share dividend, share split or other similar transaction during such period.

[Signature Page Follows]

IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.

NOVABAY PHARMACEUTICALS, INC.
By:
	Name:
	Title:

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

NOVABAY PHARMACEUTICALS, INC.

The undersigned holder hereby exercises the right to purchase _________________ of the shares of Common Stock (“Warrant Shares”) of NovaBay Pharmaceuticals, Inc., a Delaware corporation (the “Company”), evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).  Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

1.             Exercise Price.  The Holder intends that payment of the Exercise Price shall be made as (check one):

□           Cash Exercise under Section 1(a).

□           Cashless Exercise under Section 1(d) (provided the conditions therein are satisfied).

2.             Cash Exercise.  If the Holder has elected a Cash Exercise, the Holder shall pay the sum of $        to the Company in accordance with the terms of the Warrant.

3.             Delivery of Warrant Shares.  The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant. If the shares are to be delivered electronically, please complete the Depository Trust Company (“DTC”) DWAC information below.

4.            Representations and Warranties.  By its delivery of this Exercise Notice, the undersigned represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of shares of Common Stock (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended) permitted to be owned under Section 1(f) of this Warrant to which this notice relates.

Date: _______________ __, ______

Name of Registered Holder		Name of Signatory
By:
	Name:
	Title :

If shares are to be delivered electronically:

Broker Name: ________________________________

Broker DTC DWAC #: ________________________________

Account at Broker shares are to be delivered to: ________________________________

ACKNOWLEDGMENT

The Company hereby acknowledges this Exercise Notice.

NOVABAY PHARMACEUTICALS, INC.
By:
	Name:
	Title:

EX-4.5

Exhibit 4.5

COMMON STOCK PURCHASE WARRANT

NovaBay Pharmaceuticals, Inc.

Warrant Shares: _______                     Initial Exercise Date: October ___, 2015

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, _____________ or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after October __, 2015 (the “Initial Exercise Date”) and on or prior to the close of business on the five (5) year anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from NovaBay Pharmaceuticals, Inc., a Delaware corporation (the “Company”), up to ______ shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1.     Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings set forth in this Section 1:

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

“Commission” means the United States Securities and Exchange Commission.

“Common Stock” means the common stock of the Company, par value $0.01 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

1

“Exempt Issuance” means the issuance of (a) shares of Common Stock or stock awards such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights and stock appreciation rights to employees, officers, directors, scientific advisors or outside consultants (provided issuances to consultants shall not exceed 500,000 shares in any 12-month period, subject to adjustment for reverse and forward stock splits and the like) of the Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose for services rendered to the Company, (b) securities upon the exercise or exchange of or conversion of this Warrant and/or other securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the date of this Warrant, provided that such securities have not been amended after the date of this Warrant to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities, and (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a Person (or to the equityholders of a Person) which is, itself or through its subsidiaries, an operating company, a private equity fund or an owner of an asset in a business synergistic with the business of the Company and shall, in the case of a strategic transaction, provide to the Company other additional benefits in addition to the investment of funds as deemed reasonably appropriate by the Company, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or, in the case of a strategic transaction, to an entity whose primary business is investing in securities.

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Trading Day” means a day on which the principal Trading Market is open for trading.

“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange (or any successors to any of the foregoing).

2

“Transfer Agent” means Computershare Shareholder Services, Inc., located in Providence, Rhode Island, Providence County, which is the transfer agent and registrar for the Company's Common Stock in the United States and (ii) Computershare Investor Services, Inc., located in Toronto, Ontario, Canada, which is the co-transfer agent and registrar for Company's Common Stock in Canada, and any successor transfer agent of the Company.

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder, the fees and expenses of which shall be paid by the Company.

“Warrants” means the substantially identical warrants initially issued by the Company on or about the date first written above and having the same exercise price as this Warrant.

Section 2.     Exercise.

a)     Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed copy of the Notice of Exercise in the form annexed hereto by facsimile or e-mail attachment. Within three (3) Trading Days following the date that said Notice of Exercise is received by the Company, the Company shall have received from the Holder the payment of the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is permitted and is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Days of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

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b)     Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $1.81, subject to adjustment hereunder (the “Exercise Price”).

c)      Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) =	the last VWAP immediately preceding the exercise of this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise, with the determination of the date for the VWAP to be based upon the time that the Notice of Exercise is received by the Company;
(B) =	the Exercise Price of this Warrant, as adjusted hereunder; and
(X) =	the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised.  The Company agrees not to take any position contrary to this Section 2(c).

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d)     Mechanics of Exercise.

i.     Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate or registered in the Company’s share register, in each case, in the name of the Holder or its designee for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is three (3) Trading Days after the receipt by the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares; provided payment of the aggregate Exercise Price (other than in the case of a Cashless Exercise) is received within three (3) Trading Days of delivery of the Notice of Exercise. For clarity, the Company shall have no obligation to issue any Warrant Shares for which it has not been paid (unless cashless exercise is permissible).

ii.     Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iii.     Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

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iv.     Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

v.     No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

vi.     Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

vii.     Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

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e)     Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates, such other Persons, “Attribution Parties”), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder, its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties.  Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates or Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates or Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder and the Company shall have no obligation to verify or confirm the accuracy of such determination and shall have no liability for exercises of the Warrant that are not in compliance with the Beneficial Ownership Limitation. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally or in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61^st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

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Section 3.     Certain Adjustments.

a)     Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

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b)     Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents, at an effective price per share less than the Exercise Price then in effect (such lower price, the “Base Share Price” and such issuances collectively, a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance at such effective price), then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be reduced and only reduced to equal the Base Share Price. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt Issuance. The Company shall notify the Holder, in writing, no later than the Trading Day following the issuance or deemed issuance of any Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise.

c)     Subsequent Rights Offerings. If at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock that does not otherwise result in an adjustment pursuant to Section 3(a) above (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

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d)     Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “Black Scholes Value” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant and the other Transaction Documents in accordance with the provisions of this Section 3(d) pursuant to customary written agreements prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.

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e)     Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest whole share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

f)     Notice to Holder.

i.     Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

ii.     Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivering thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

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Section 4.     Transfer of Warrant.

a)     Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

b)     New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Initial Exercise Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

c)     Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

Section 5.     Miscellaneous.

a)     No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3.

b)     Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

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c)     Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

d)     Authorized Shares.

The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

13

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

e)     Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of this Warrant shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant. If any party shall commence an action or proceeding to enforce any provisions of this Warrant, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.

f)     Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

g)     Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company intentionally and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

14

h)     Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service, addressed to the Company, at ________________, Attention: ___________, facsimile number: ___________, email address: _______________, or such other facsimile number, email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, e-mail address or address of such Holder appearing on the books of the Company. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address set forth in this Section 5(h) prior to 5:30 p.m. (New York City time) on any Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address set forth in this Section 5(h) on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.

i)     Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

j)     Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

k)     Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

l)     Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

m)    Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

15

n)     Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

o)     FAST Compliance. While this Warrant is outstanding, the Company shall maintain a transfer agent that participates in the DTC Fast Automated Securities Transfer Program.

p)     Equal Treatment of Holders. No consideration (including any modification of this Warrant) shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of the Common Stock purchase warrants issued as part of the offering pursuant to which this Warrant (this Warrant, collectively with all such warrants, the “Offering Warrants”) is issued unless the same consideration is also offered to all holders of Offering Warrants; provided that the Holder shall not take any action to prevent the amendment, consent or waiver of Common Stock purchase warrants held by other holders of the Offering Warrants if the Holder is offered the same consideration as offered to the other holders of the Offering Warrants. For clarification purposes, this provision constitutes a separate right granted to each holder of the Offering Warrants, including the Holder, by the Company and negotiated separately by each such holder, and is intended for the Company to treat such holders as a class and shall not in any way be construed as such holders acting in concert or as a group with respect to the purchase, disposition or voting of securities or otherwise.

********************

16

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

NovaBay Pharmaceuticals, Inc.

By:__________________________________________

      Name:

      Title:

17

NOTICE OF EXERCISE

To:     NovaBay Pharmaceuticals, Inc.

(1)     The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)     Payment shall take the form of (check applicable box):

[ ] in lawful money of the United States; or

[ ] if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3)     Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

_______________________________

The Warrant Shares shall be delivered to the following DWAC Account Number:

_______________________________

_______________________________

_______________________________

[SIGNATURE OF HOLDER]

Name of Investing Entity: _______________________________________________________________________________________________

Signature of Authorized Signatory of Investing Entity: _________________________________________________________________________

Name of Authorized Signatory: ___________________________________________________________________________________________

Title of Authorized Signatory: ____________________________________________________________________________________________

Date: _______________________________________________________________________________________________________________

ASSIGNMENT FORM

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to exercise the warrants.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

Name:
	(Please Print)
Address:
	(Please Print)
Dated: _______________ __, ______
Holder’s Signature: ______________________________
Holder’s Address: ______________________________

EX-10.7

Exhibit 10.7

NON-EMPLOYEE DIRECTOR COMPENSATION PLAN
Effective January 1, 2017

 1.           Purpose. The purpose of NovaBay Pharmaceuticals, Inc. (hereinafter referred to as “NovaBay” or the “Company) Non-Employee Director Compensation Plan (the “Plan”) is to advance the interests of NovaBay and its shareholders by closely aligning the interests of the Non-Employee Directors with the Company and its shareholders. This Plan requires the payment of the annually established compensation payable to Non-Employee Directors for their service to be in cash and or, as elected, stock options to purchase the Company’s Common Stock (“Options). Options issuable under this Plan shall be from the shareholder approved 2007 Omnibus Incentive Plan.

 2.           Administration. The Compensation Committee of the Board (the “Committee”) shall administer the Plan. The Committee shall, subject to the provisions of the Plan, have the power to construe the Plan, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for the administration of the Plan, as it may deem desirable. Any decisions of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. The Committee may authorize any one or more of its members or any officer of the Company to execute and deliver documents on behalf of the Committee. No member of the Committee shall be liable for anything done or omitted to be done by him or her or by any other member of the Board in connection with the Plan, except for his or her own willful misconduct or as expressly provided by statute.

3.           Participation; Amount of Non-Employee Director Compensation. The Committee shall annually approve the amount of compensation payable for services to be performed by Non-Employee Directors. Effective January 1, 2017 such fees shall be payable in either cash and/or Options as follows:

a. Cash Compensation

Status	Compensation	Comment
Non-Employee Director	$30,000 per year	Paid Quarterly
Chairman of the Comp Committee	$10,000 per year	Paid Quarterly
Chairman of the Audit Committee	$12,000 per year	Paid Quarterly
Chairman of the N&CG Committee	$8,000 per year	Paid Quarterly
Member of the Audit Committee	$6,000 per year	Paid Quarterly
Member of the Comp or N&CG	$5,000 per year	Paid Quarterly

4.         Payment of Non-Employee Director Compensation.

Before the end of the prior calendar year, or in the case of a new director, within the first quarter of service, each director can irrevocably elect in writing to take 25%, 50%, 75% or 100% of his or her annual cash retainer for service as a non-employee director, or in the case of a new director, his or her pro rata retainer for service as a non-employee director (but only for quarterly payments to be paid in quarters subsequent to the quarter in which the new director becomes a new director and, only for quarterly payments to be paid subsequent to the date of such irrevocable election), in the form of a stock option. The number of shares subject to such stock option shall be the number of shares of NovaBay stock as calculated using the Black-Scholes model using the same methodology NovaBay has most recently used for financial reporting purposes, computed at the time the stock option is granted, equal the amount of annual cash compensation foregone. Once the share amount has been calculated, a twenty-five percent (25%) “kicker” shall be added to the grant. The kicker shall only apply to the annual election made before the beginning of the calendar year. The options shall be granted on the first business day of the year, or in the case of a new director, the Options shall be granted on the day the first cash payment is due for which the election is made in lieu of all or a portion of such cash payment. The options will have an exercise price equal to the closing price of NovaBay’s common stock on the grant date as reported by the NYSE Mkt. The stock options shall vest in equal monthly installments over the remainder of the calendar year.

Each Non-Employee Director shall be paid the cash compensation payable to such Non-Employee Director as determined pursuant to Section 3 above on the first business day of the calendar quarter for such quarter.

5.         Miscellaneous Provisions.

(a) Neither the Plan nor any action taken hereunder shall be construed as giving any Non-Employee Director any right to be elected or re-elected as a director of the Company.

(b) A participant’s rights and interest under the Plan may not be assigned or transferred, hypothecated, or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of a participant’s death, by will, or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no such right or interest of any participant in the Plan shall be subject to any obligation or liability of such participant.

(c) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of the Non-Employee Director’s compensation.

(d) The provisions of this Plan shall be governed by and construed in accordance with the laws of the State of California.

2 

  (e) Headings are given to the sections of this Plan solely as a convenience to facilitate reference. Such headings, numbering, and paragraphing shall not in any case be deemed in any way material or relevant to the construction of this Plan or any provisions thereof. The use of the singular shall also include within its meaning the plural, where appropriate, and vice versa.

6.       Termination. This Plan shall terminate upon the earlier of the following dates or events to occur:

(a) upon the adoption of a resolution of the Committee and approved by the Board terminating the Plan; or

(b) December 31, 2017.

No termination of the Plan shall materially and adversely affect any of the rights or obligations of any person without his or her consent with respect to any shares of Common Stock theretofore issuable under the Plan.

3

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Registration Statements on Form S-8 (File Nos. 333-215680, 333-211754, 333-208985, 333-203109, 333-196764, 333-194383, 333-185998, 333-180461, 333-171981, 333-147334, 333-157041, and 333-164469) and Form S-3 (File Nos. 333-211944, 333-211943 333-204998, 333-203735, 333-203112, 333-159917 and 333-180460) of NovaBay Pharmaceuticals, Inc. of our report dated March 23, 2017, relating to the consolidated financial statements of NovaBay Pharmaceuticals, Inc., which appears in this Annual Report on Form 10-K.

/s/ OUM & CO. LLP

San Francisco, California

March 23, 2017

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO EXCHANGE ACT

RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark M. Sieczkarek, certify that:

1. I have reviewed this Form 10-K of NovaBay Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 23, 2017

/s/ Mark M. Sieczkarek

Mark M. Sieczkarek 

Chairman and Chief Executive Officer

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO EXCHANGE ACT

RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas J. Paulson, certify that:

1. I have reviewed this Form 10-K of NovaBay Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 23, 2017

/s/ Thomas J. Paulson

Thomas J. Paulson

Chief Financial Officer

(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of NovaBay Pharmaceuticals, Inc. (the Company) on Form 10-K for the fiscal year ended December 31, 2016 (the Report), I, Mark M. Sieczkarek, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 23, 2017

/s/ Mark M. Sieczkarek

Mark M. Sieczkarek 

Chairman and Chief Executive Officer

This Certification is made solely for the purpose of 18 USC Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of NovaBay Pharmaceuticals, Inc. (the Company) on Form 10-K for the fiscal year ended December 31, 2016 (the Report), I, Thomas J. Paulson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 23, 2017

/s/ Thomas J. Paulson

Thomas J. Paulson

Chief Financial Officer

This Certification is made solely for the purpose of 18 USC Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

XML

Document And Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2016	Mar. 22, 2017	Jun. 30, 2016
Document Information [Line Items]
Entity Registrant Name	NOVABAY PHARMACEUTICALS, INC.
Entity Central Index Key	0001389545
Trading Symbol	nby
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		15,288,175
Entity Public Float			$ 7,530,005
Document Type	10-K
Document Period End Date	Dec. 31, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	FY
Amendment Flag	false

XML

Consolidated Balance Sheets - USD ($)	Dec. 31, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 9,512,000	$ 2,385,000
Accounts receivable, net of allowance for doubtful accounts ($10 and $40 at December 31 2016, and December 31, 2015, respectively)	2,120,000	536,000
Inventory, net of allowance for excess and obsolete inventory ($196 and $45 at December 31, 2016 and 2015, respectively)	873,000	1,345,000
Prepaid expenses and other current assets	1,966,000	261,000
Total current assets	14,471,000	4,527,000
Property and equipment, net	371,000	395,000
Other assets	539,000	155,000
TOTAL ASSETS	15,381,000	5,077,000
Current liabilities:
Accounts payable	455,000	2,483,000
Accrued liabilities	1,801,000	1,980,000
Deferred revenue	2,067,000	170,000
Total current liabilities	4,323,000	4,633,000
Deferred revenue - non-current	1,986,000	2,248,000
Deferred rent	327,000	189,000
Notes payable, related party		1,655,000
July 2011 Warrants, Warrant Liability	1,446,000	1,450,000
Other liabilities	198,000
Total liabilities	8,280,000	10,175,000
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Preferred stock: 5,000 shares authorized; none outstanding at December 31, 2016 and 2015
Common stock, $0.01 par value; 240,000 shares authorized 15,269 and 3,486 shares issued and outstanding at December 31, 2016 and 2015, respectively	153,000	35,000
Additional paid-in capital	110,619,000	85,387,000
Accumulated other comprehensive loss
Accumulated deficit	(103,671,000)	(90,520,000)
Total stockholders' equity (deficit)	7,101,000	(5,098,000)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$ 15,381,000	$ 5,077,000

XML

Consolidated Balance Sheets (Parentheticals) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Accounts receivable, allowance for doubtful accounts	$ 10	$ 40
Inventory, allowance for obsolete inventory accounts and lower cost market	$ 196	$ 45
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	240,000,000	240,000,000
Common stock, shares issued (in shares)	15,269,000	3,486,000
Common stock, shares outstanding (in shares)	15,269,000	3,486,000

XML

Consolidated Statements of Operations and Comprehensive Loss - USD ($) shares in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Sales:
Product Revenue, net	$ 11,617	$ 4,146	$ 684
Other Revenue, net	280	235	370
Total Sales, net	11,897	4,381	1,054
Product Cost of Goods Sold	2,464	1,261	486
Gross Profit	9,433	3,120	568
Research and development	1,371	5,728	9,483
Sales and marketing	11,809	10,523	1,754
General and administrative	7,235	8,006	6,235
Total Operating Expenses	20,415	24,257	17,472
Operating Loss	(10,982)	(21,137)	(16,904)
Non-cash gain (loss) on changes in fair value of warrant liability	(2,099)	2,149	1,664
Other income (expense), net	(68)	17	48
Loss before provision for income taxes	(13,149)	(18,971)	(15,192)
Provision for income tax	(2)	(2)	(2)
Net loss	(13,151)	(18,973)	(15,194)
Change in Unrealized gains on available for sale securities			15
Comprehensive loss	$ (13,151)	$ (18,973)	$ (15,179)
Loss per share (basic and diluted) (in dollars per share)	$ (1.40)	$ (6.82)	$ (7.65)
Basic and Diluted Shares used in loss per share calculation (in shares)	9,408	2,784	1,985

XML

Consolidated Statements of Stockholders' Equity (Deficit) - USD ($) $ in Thousands	Shelf Offering [Member] Common Stock [Member]	Shelf Offering [Member] Additional Paid-in Capital [Member]	Shelf Offering [Member]	Pioneer Pharma Co. [Member] Additional Paid-in Capital [Member]	Pioneer Pharma Co. [Member]	Employee [Member] Common Stock [Member]	Employee [Member] Additional Paid-in Capital [Member]	Employee [Member]	Nonemployees [Member] Common Stock [Member]	Nonemployees [Member] Additional Paid-in Capital [Member]	Nonemployees [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	AOCI Attributable to Parent [Member]	Retained Earnings [Member]	Total
Balance (in shares) at Dec. 31, 2013												1,785,000
Balance at Dec. 31, 2013												$ 18	$ 64,866	$ (15)	$ (56,353)	$ 8,516
Net loss															(15,194)	(15,194)
Change in unrealized gains (losses) on investments														$ 15		$ 15
Issuance of common stock (in shares)	275,000
Issuance of common stock	$ 3	$ 7,122	$ 7,125	$ 205	$ 205
Issuance of stock for option exercises (in shares)												2,000				2,000
Issuance of stock for option exercises													34			$ 34
Issuance of stock to consultants for services (in shares)												2,000
Issuance of stock to consultants for services													28			28
Employee bonus paid in common stock (in shares)												1,000
Employee bonus paid in common stock													77			77
Stock-based compensation expense related to employee and director stock options													853			853
Stock-based compensation expense related to non-employee stock options													189			189
Vesting of employee restricted stock awards (in shares)												1,000
Balance (in shares) at Dec. 31, 2014												2,066,000
Balance at Dec. 31, 2014												$ 21	73,374		(71,547)	1,848
Net loss															(18,973)	(18,973)
Issuance of common stock (in shares)	85,000											4,000
Issuance of common stock	$ 1	1,176	1,177
Issuance of stock to consultants for services													63			63
Employee bonus paid in common stock (in shares)												3,000
Employee bonus paid in common stock													62			62
Stock-based compensation expense related to employee and director stock options													1,194			1,194
Stock-based compensation expense related to non-employee stock options													188			188
Balance (in shares) at Dec. 31, 2015												3,486,000
Balance at Dec. 31, 2015												$ 35	85,387		(90,520)	(5,098)
Issuance of stock and warrants, net of offering costs (in shares)												1,328,000
Issuance of stock and warrants, net offering costs												$ 13	11,505			11,518
Equity transferred to warrant liability													(2,175)			(2,175)
Net loss															(13,151)	$ (13,151)
Issuance of common stock (in shares)	7,692,000											2,000
Issuance of common stock	$ 77	$ 13,571	$ 13,648
Issuance of stock for option exercises (in shares)																0
Issuance of stock to consultants for services													8			$ 8
Stock-based compensation expense related to employee and director stock options													1,316			1,316
Stock-based compensation expense related to non-employee stock options													269			269
Balance (in shares) at Dec. 31, 2016												15,269,000
Balance at Dec. 31, 2016												$ 153	110,619		$ (103,671)	7,101
Issuance of stock and warrants, net of offering costs (in shares)	3,977,000
Issuance of stock and warrants, net offering costs												$ 40	7,389			7,429
Fair market value of warrants transferred to equity upon exercise													2,103			2,103
Warrant modification													$ 270			$ 270
Vesting of restricted stock awards (in shares)						73,000			41,000
Vesting of restricted stock awards						$ 1	$ 173	$ 174		$ 133	$ 133
Shares retired as a result of the 1 for 25 reverse stock split (in shares)												(2,000)

XML

Consolidated Statements of Stockholders' Equity (Deficit) (Parentheticals)		12 Months Ended
	Dec. 11, 2015	Dec. 31, 2016
Reverse Stock Split [Member]
Reverse Stock Split	25	25

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Cash flows from operating activities:
Net loss	$ (13,151)	$ (18,973)	$ (15,194)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	114	164	232
Net realized loss on sales of short-term investments			40
Gain on sale and disposal of property and equipment	(219)	(1)	(54)
Issuance of RSUs to employees	173
Issuance of RSUs to non-employees	133
Fair Value Adjustment of Warrants	270
Note receivable impairment	91
Non-cash (gain) loss on change in fair value of warrant liability	2,099	(2,149)	(1,664)
Property and equipment impairment	70
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(1,585)	(299)	555
Increase (decrease) in inventory	472	(751)	(451)
(Increase) decrease in prepaid expenses and other assets	(1,470)	402	102
Increase in other assets long-term	(474)
Increase (decrease) in accounts payable and accrued liabilities	(2,162)	1,655	(252)
Increase in deferred rent	327	17	36
Increase in accrued taxes	87
Increase (decrease) in deferred revenue	1,447	(6)	553
Increase in other liabilities long-term	198
Net cash used in operating activities	(12,135)	(18,559)	(15,055)
Cash flows from investing activities:
Purchases of property and equipment	(160)	(123)	(68)
Proceeds from disposal of property and equipment		37	128
Purchases of short-term investments			(4,012)
Proceeds from maturities and sales of short-term investments			6,550
Net cash provided (used) by investing activities	(160)	(86)	2,598
Cash flows from financing activities:
Proceeds from common stock issuances, net	13,648	11,519	227
Proceeds from exercise of options and warrants	7,429	1,250	34
Proceeds from borrowings	1,365	1,655
Repayment of borrowings	(3,020)
Proceeds from shelf offering, net		1,177	7,125
Net cash provided by financing activities	19,422	15,601	7,386
Net increase (decrease) in cash and cash equivalents	7,127	(3,044)	(5,071)
Cash and cash equivalents, beginning of period	2,385	5,429	10,500
Cash and cash equivalents, end of period	9,512	2,385	5,429
Supplemental disclosure of non-cash information:
Stock issued to consultants for services	8	63	7
Property and equipment purchases, included in accounts payable and accrued liabilities	60
Cash paid for interest	51
Options exercised		(4)
Warrant liability transferred to (from) equity	2,103	(2,175)
Exchange of equipment for services	279
Employees and Directors [Member]
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense for options and stock issued	1,316	1,194	853
Nonemployees [Member]
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense for options and stock issued	129	188	189
Bonus Paid in Stock [Member]
Supplemental disclosure of non-cash information:
Other significant noncash transaction		62	54
Severance Paid in Restricted Stock Units to Non-employees [Member]
Supplemental disclosure of non-cash information:
Other significant noncash transaction	$ 140

XML

Note 1 - Organization

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

NOTE

1.

ORGANIZATION

NovaBay Pharmaceuticals, Inc. (the “Company”) is a pharmaceutical company focused on commercializing prescription Avenova® daily lid and lash hygiene in the domestic eye care market.

The Company was incorporated under the laws of the State of California on

January

 

19,

2000,

as NovaCal Pharmaceuticals, Inc. It had no operations until

July

 

1,

2002,

on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In

February

2007,

it changed its name from NovaCal Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In

August

2007,

it formed

two

subsidiaries––NovaBay Pharmaceuticals Canada, Inc., a wholly-owned subsidiary incorporated under the laws of British Columbia (Canada), which was formed to conduct research and development in Canada and was dissolved in

July

2012,

and DermaBay, Inc., a wholly-owned U.S. subsidiary, which

may

explore and pursue dermatological opportunities (“DermaBay”). In

June

2010,

it changed the state in which it is incorporated (the “Reincorporation”), and is now incorporated under the laws of the State of Delaware. All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation, and to the Delaware corporation on and after the date of the Reincorporation. Historically, the Company operated as

four

business segments. At the direction of its Board of Directors, the Company is focused primarily on commercializing prescription Avenova for managing hygiene of the eyelids and lashes in the United States and is now managed as a

single

business and not

four

segments.

Effective

December

11,

2015,

the Company effected a

1

-for-

25

reverse split of its outstanding common stock (“Reverse Stock Split”) (See Note

11).

 

Liquidity

With the funds available at

December

31,

2016,

the Company believes these resources will be sufficient to fund its operations into

2018.

The Company has sustained operating losses for the majority of its corporate history and expects that its

2017

expenses will exceed its

2017

revenues, as we continue to re-invest in our Avenova commercialization efforts. The Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company’s planned operations raise doubt about its ability to continue as a going concern. The Company’s liquidity needs will be largely determined by the success of operations in regards to the commercialization of Avenova. The Company’s plans to alleviate the doubt of its going concern, which are being implemented to mitigate these conditions, primarily include its ability to control the timing and spending on its sales and marketing programs and raising additional funds through equity financings. The Company also

may

consider other plans to fund operations including:

(1)

 out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee;

(2)

 raising additional capital through debt financings or from other sources;

(3)

 reducing spending on

one

or more its sales and marketing programs; and/or

(4)

 restructuring operations to change its overhead structure. The Company

may

issue securities, including common stock and warrants through private placement transactions or registered public offerings, which would require the filing of a Form S-

1

or S-

3

registration statement with the Securities and Exchange Commission (“SEC”). The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of the commercialization of Avenova. The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that

may

result from uncertainty related to its ability to continue as a going concern.

XML

Note 2 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Significant Accounting Policies [Text Block]

NOTE

2.

 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are expressed in U.S. dollars.

Reclassifications

Prior period amounts in the accompanying consolidated balance sheets have been reclassified to conform to current period presentation. The reclassifications did not change total assets, total liabilities, or total stockholders’ equity. Additionally, prior period amounts in the accompanying consolidated statement of operations and comprehensive loss and have been reclassified to conform to current period presentation. The reclassifications did not change the net loss or loss per share

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, DermaBay, which was dissolved by the Company in

April

2016.

All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates include useful lives for property and equipment and related depreciation calculations, estimated amortization period for payments received from product development and license agreements as they relate to revenue recognition, assumptions for valuing options and warrants, and income taxes. Actual results could differ from those estimates.

Cash and Cash Equivalents and Short-Term Investments

The Company considers all highly-liquid instruments with a stated maturity of

three

months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of

December

31,

2016,

and

December

31,

2015,

the Company’s cash and cash equivalents were held in

three

highly-rated, major financial institutions in the United States.

The Company classifies all highly-liquid investments with a stated maturity of greater than

three

months at the date of purchase as short-term investments. Short-term investments generally consist of municipal and corporate debt securities. The Company has classified its short-term investments as available-for-sale. The Company does not intend to hold securities with stated maturities greater than

twelve

months until maturity. These securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive loss until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. A decline in the market value below cost of any available-for-sale security that is determined to be other-than-temporary results in a revaluation of its carrying amount to fair value and an impairment charge to earnings, resulting in a new cost basis for the security. No such impairment charges were recorded for the periods presented. The interest income and realized gains and losses are included in other expense, net, within the consolidated statements of operations and comprehensive loss. Interest income is recognized when earned. As of

December

31,

2016

and

December

31,

2015,

the Company had no short-term investments.

Concentrations of Credit Risk, Major Partners and Customers, and Suppliers

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits of cash and cash equivalents with

three

highly-rated, major financial institutions in the United States.

Deposits in these banks

may

exceed the amount of federal insurance provided on such deposits. The Company does not believe it is exposed to significant credit risk due to the financial position of the financial institutions in which these deposits are held.

During the years ended

December

31,

2016

and

2015

revenues were derived primarily from sales of Avenova directly to doctors through the Company’s webstore and to

three

major distribution partners. During the year ended

December

31,

2014

revenues were derived primarily from

one

collaboration partner, service revenues and sales of NeutroPhase.

As of

December

31,

2016,

December

31,

2015

and

December

31,

2014

revenues from our major distribution or collaboration partners greater than

10%

are as follows:

	Year Ended December 31,
Major distribution or collaboration partner	2016			2015		2014
Distributer A		20	%		*		*
Distributer B		22	%		*		*
Distributer C		16	%		*		*
Collaborator D		*			*		15	%

*Not greater than

10%

As of

December

31,

2016,

and

December

31,

2015

accounts receivable from our major distribution or collaboration partners greater than

10%

are as follows:

	Year Ended December 31,
Major distribution or collaboration partner	2016			2015
Distributer A		22	%		36	%
Distributer B		24	%		11	%
Distributer C		31	%		*

*Not greater than

10%

The Company relies on

two

third

party sole source manufacturers to produce its finished goods. The Company does not have any manufacturing facilities and intends to continue to rely on

third

parties for the supply of finished goods. Third party manufacturers

may

not be able to meet the Company’s needs with respect to timing, quantity or quality.

Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. Our warrant liability is carried at fair value.

The Company measures the fair value of financial assets and liabilities based on U.S. GAAP guidance, which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements.

Under U.S. GAAP, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is also established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are

three

levels of inputs that

may

be used to measure fair value:

Level

1

– quoted prices in active markets for identical assets or liabilities;

Level

2

– quoted prices for similar assets and liabilities in active markets or inputs that are observable;

Level

3

– inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

Allowance for Doubtful Accounts

The Company charges bad debt expense and records an allowance for doubtful accounts when management believes it unlikely a specific invoice will be collected. Management identifies amounts due that are in dispute and it believes are unlikely to be collected at the end of

2016.

At

December

31,

2016

and

December

31,

2015,

management had reserved

$10

thousand and

$40

thousand, respectively, primarily based on specific amounts that are in dispute and or are over

120

days past due.

Inventory

Inventory is comprised of 

(1)

raw materials and supplies, such as bottles, packaging materials, labels, boxes, pumps;

(2)

goods in progress, which are normally unlabeled bottles; and

(3)

finished goods. We utilize contract manufacturers to produce our products and the cost associated with manufacturing is included in inventory. At

December

31,

2016

and

2015,

management had recorded an allowance for excess and obsolete inventory of

$196

thousand and

$45

thousand, respectively.

Inventory is stated at the lower of cost or market value determined by the

first

-in,

first

-out method.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of

five

to

seven

years for office and laboratory equipment,

three

years for computer equipment and software and

seven

years for furniture and fixtures. Leasehold improvements are amortized over the shorter of

seven

years or the lease term.

The costs of normal maintenance, repairs, and minor replacements are charged to operations when incurred.

In

September

2016,

the Company sub-leased its former headquarters and determined that its leasehold improvements were impaired. This resulted in a

$66

thousand impairment charge recorded to general and administrative expense for the

third

quarter of

2016,

and is reflected in the results for the year ended

December

31,

2016.

 

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with U.S. GAAP, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally,

may

indicate that an impairment of long-lived assets held for use are present. Management periodically evaluates the carrying value of long-lived assets. During the

first

quarter of fiscal year

2016,

the Company impaired a note receivable which was deemed to no longer be collectable, as the originator of the loan is not in business and the collateral held against the loan did not possess value in an amount sufficient to satisfy the loan. As a result, a

$91

thousand impairment charge was recorded to research and development expense for the

first

quarter of fiscal year

2016,

and is reflected in the results for the year ended

December

31,

2016.

Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the statements of operations.

Comprehensive Income (Loss)

ASC

220,

Comprehensive Income,

requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported. The Company reports unrealized gains and losses on its available-for-sale securities as other comprehensive income (loss).

Revenue Recognition

The Company sells products through a limited number of distributors and via its webstore. The Company generally records product sales upon shipment to the final customer for its webstore sales and upon shipment from its distributor to the final customers for its major distribution partners.

The Company recognizes product revenue when: (i) persuasive evidence that a sale arrangement exists; (ii) delivery has occurred and title has passed; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue from sales transactions where the customer has the right to return the product is recognized at the time of sale only if: (i) the Company’s price to the customer is substantially fixed or determinable at the date of sale; (ii) the customer has paid the Company, or the customer is obligated to pay the Company and the obligation is not contingent on resale of the product; (iii) the customer's obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product; (iv) the customer acquiring the product for resale has economic substance apart from that provided by the Company; (v) the Company does not have significant obligations for future performance to directly bring about resale of the product by the customer; and (vi) the amount of future returns can be reasonably estimated. If these factors were to vary, the resulting change could have a material effect on our revenue recognition and on the Company’s results of operations

Product Revenue Allowances

Product revenue is recognized, net of cash consideration paid to the Company’s customers and wholesalers, for services rendered by wholesalers in accordance with such wholesalers’ agreements and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers' purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

Other product revenue allowances include certain prompt pay discounts and allowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue or as a selling expense at the later of the date at which the related revenue is recognized or the date at which the allowance is offered.

Other Revenue

License and collaboration revenue is primarily generated through agreements with strategic partners for the development and commercialization of the Company’s product candidates. The terms of the agreements typically include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of certain milestones and royalties on net product sales. In accordance with authoritative guidance, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables are accounted for as a single unit of accounting and revenue is recognized over the performance obligation period. Revenue is recognized when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. If these factors were to vary the resulting change could have a material effect on our revenue recognition and on our results of operations.

Cost of Goods Sold

Cost of goods sold includes

third

party manufacturing costs, shipping costs, and other costs of goods sold. Cost of goods sold also includes any necessary allowances for excess inventory that

may

expire and become unsalable.

Research and Development Costs

The Company charges research and development costs to expense as incurred. These costs include salaries and benefits for research and development personnel, costs associated with clinical trials managed by contract research organizations, and other costs associated with research, development and regulatory activities. Research and development costs

may

vary depending on the type of item or service incurred, location of performance or production, or lack of availability of the item or service, and specificity required in production for certain compounds. The Company uses external service providers to conduct clinical trials, to manufacture supplies of product candidates and to provide various other research and development-related products and services. The Company’s research, clinical and development activities are often performed under agreements it enters into with external service providers.  The Company estimates and accrues the costs incurred under these agreements based on factors such as milestones achieved, patient enrollment, estimates of work performed, and historical data for similar arrangements.  As actual costs are incurred, the Company adjusts its accruals.  Historically, the Company’s accruals have been consistent with management’s estimates, and no material adjustments to research and development expenses have been recognized.  Subsequent changes in estimates

may

result in a material change in the Company’s expenses, which could also materially affect its results of operations.

Patent Costs

Patent costs, including legal expenses, are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of Accounting Standards Updates (“ASU”) No.

2014

-

12,

Compensation-Stock Compensation (Topic

718)

. Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date for all stock-based awards to employees and directors and is recognized as expense over the requisite service period, which is generally the vesting period. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model. See Note

12

for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. The Company accounts for restricted stock unit awards issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.

Common Stock Warrant Liabilities

For warrants that are newly issued or modified and there is a deemed possibility that the Company

may

have to settle them in cash, or for warrants it issues or modifies that contain an exercise price adjustment feature, the Company records the fair value of the issued or modified warrants as a liability at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model. The Lattice model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of our judgment. 

Net Income (Loss) per Share

The Company computes net income (loss) per share by presenting both basic and diluted earnings (loss) per share (“EPS”).

Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing, diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods because their effect would be anti-dilutive. During years ended

December

31,

2016,

2015

and

2014,

there is no difference between basic and diluted net loss per share. The following table sets forth the reconciliation between basic EPS and diluted EPS, after giving effect to the reverse stock split.

	Year Ended December 31,
(in thousands, except per share data)	2016			2015			2014
Net loss	$	(13,151	)	$	(18,973	)	$	(15,194	)
Basic shares		9,408			2,784			1,985
Add: shares issued upon assumed exercise of stock options and warrants		—			—			—
Diluted shares		9,408			2,784			1,985
Basic EPS	$	(1.40	)	$	(6.82	)	$	(7.65	)
Diluted EPS	$	(1.40	)	$	(6.82	)	$	(7.65	)

The following outstanding stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Stock options		1,489		388		323
Stock warrants		565		1,458		197

Recent Accounting Pronouncements

In

May

2014,

the Financial Accounting Standards Board (“FASB”) issued ASU No.

2014

-

09,

Revenue from Contracts with Customers

(Topic

606).

In

August

2015

and

March,

April,

May

and

December

2016,

the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These

may

include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each performance obligation. ASU

2014

-

09

as amended is effective for interim and annual reporting periods beginning after

December

15,

2017

but permitted the Company to adopt the standard early, but not before the original effective date of

December

15,

2016.

The Company plans to adopt the new standard effective

January

1,

2018

with a modified retrospective transition applying the new guidance to the most current period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most current period presented.

While the Company is still in the process of assessing the potential impact of this new standard on its consolidated financial statements, the Company has identified that transactions which under current guidance are recognized upon shipment from its distributor to the final customers for its major distribution partners will be recognized upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to. As a result, the Company will record contract liabilities for the invoiced amounts that are estimated to be subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, chargebacks, and product returns. The constraint on variable consideration for product returns will be a new estimation resulting from the earlier recognition under the new guidance.

The Company has also identified that license and collaboration revenue that is currently accounted for as a combined unit of accounting because products or services are not separable,

may

be identified as separate performance obligations that are capable of being distinct under the new guidance. As a result, the transaction price under these arrangements, including upfront fees and milestone payments,

may

be allocated differently to performance obligations, which

may

each be recognized at earlier points in time or with a different pattern of performance over time.

The Company is still evaluating its major distribution agreements and its license and collaboration agreements and assessing the impact of adoption of the new standard to its consolidated financial statements. The company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that

may

impact its current conclusions, and will expand its analysis to include any new or modified revenue arrangements prior to adoption. The Company expects to complete the efforts by the

fourth

quarter of

2017.

 

In

August

2014,

FASB issued ASU

2014

-

15,

 

Presentation of Financial Statements

 – 

Going Concern (Subtopic

205

-

40):

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

. This new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosure if substantial doubt exists. The new standard is effective for annual periods ending after

December

15,

2016

and for annual periods and interim periods thereafter. Early adoption is permitted. The Company adopted ASU

2014

-

15

and for adoption impact see

Note1

to the financial statements under “

liquidity

”

In

July

2015,

the FASB issued ASU No.

2015

-

11,

Inventory (Topic

330):

Simplifying the Measurement of Inventory

, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU No.

2015

-

11

defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for the Company in the

first

quarter of fiscal year

2017,

with early adoption permitted. The Company is still evaluating, but does not believe the implementation of this guidance will result in a material impact to its consolidated financial statements.

In

January

2016,

the FASB issued ASU

2016

-

01,

Financial Instruments – Overall (Subtopic

825

-

10)

:

Recognition and Measurement of Financial Assets and Financial Liabilities

, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This guidance will be effective for the Company beginning in the

first

quarter of fiscal year

2018.

The Company is evaluating the effects of the adoption of this guidance to its consolidated financial statements.

In

February

2016,

the FASB issued ASU

2016

-

02,

Leases (Topic

842)

, which supersedes the lease accounting requirements in

Leases (Topic

840)

. ASU

2016

-

02

requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the

first

quarter of fiscal year

2019.

The Company is evaluating the effects of the adoption of this guidance on its consolidated financial statements.

In

March

2016,

the FASB issued ASU

2016

-

09,

Compensation – Stock Compensation (Topic

718):

Improvements to Employee Share-Based Payment Accounting,

which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective beginning in the

first

quarter of fiscal year

2017

and early adoption is permitted in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes such interim period. The Company is still evaluating, but does not believe the implementation of this guidance will result in a material impact to its consolidated financial statements.

In

August

2016,

the FASB issued ASU

2016

-

15,

Classification of Certain Cash Receipts and Cash Payments (Topic

230),

which addresses

eight

specific issues regarding the treatment of cash flow. This update is effective for the Company for its fiscal year

2018.

The Company is currently evaluating the effects of the adoption of ASU

2016

-

15

to its consolidated financial statements.

In

November

2016,

the FASB issued ASU

2016

-

18,

Statement of Cash Flows (Topic

230),

that will require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This update is effective for the Company for its fiscal year

2018.

The Company is currently evaluating the effects of the adoption of ASU

2016

-

18

to its consolidated financial statements.

XML

Note 3 - Fair Value Measurements

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE

3.

FAIR VALUE MEASUREMENTS

The Company measures the fair value of financial assets and liabilities based on authoritative guidance that defines fair value, establishes a framework consisting of

three

levels for measuring fair value, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be receive for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The Company’s cash equivalents and investments are classified within Level

1

or Level

2

of the fair value hierarchy because they are valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of investments that are generally classified within Level

1

of the fair value hierarchy include money market securities and certificates of deposits. The types of investments that are generally classified within Level

2

of the fair value hierarchy include corporate securities and U.S. government securities.

The Company’s warrant liability is classified within level

3

of the fair value hierarchy because the value is calculated using significant judgment based on our own assumptions in the valuation of this liability.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of

December

31,

2016:

	Fair Value Measurements Using
(in thousands)	Balance at December 31, 2016		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	100	$	100	$	—	$	—
Restricted cash held as a certificate of deposit		324		324		—		—
Deposit held as a certificate of deposit		150		150		—		—
Total assets	$	574	$	574	$	—	$	—
Liabilities
Warrant liability	$	1,446	$	—	$	—	$	1,446
Total liabilities	$	1,446	$	—	$	—	$	1,446

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of

December

31,

2015:

	Fair Value Measurements Using
(in thousands)	Balance at December 31, 2015		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	2,385	$	2,385	$	—	$	—
Total assets	$	2,385	$	2,385	$	—	$	—
Liabilities
Warrant liability	$	1,450	$	—	$	—	$	1,450
Total liabilities	$	1,450	$	—	$	—	$	1,450

For the year ended

December

31,

2016,

as a result of the fair value adjustment of the warrant liability, the Company recorded a non-cash loss on a change in the fair value of

$2.1

million in its consolidated statements of operations and comprehensive loss.  See Note 

10

for further discussion on the calculation of the fair value of the warrant liability.

(in thousands)	2016			2015
Fair value of warrant liability at January 1	$	1,450		$	173
Fair value of warrants issued		—			1,251
Fair value of warrants transferred (to) from equity upon exercise		(2,103	)		2,175
Increase (decrease) in fair value on exercise date and December 31		2,099			(2,149	)
Fair value of warrant liability at December 31	$	1,446		$	1,450

XML

Note 4 - Prepaid Expenses and Other Current Assets

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Prepaid Expenses and Other Current Assets [Text Block]

NOTE

4.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

(in thousands)	December 31, 2016		December 31, 2015
Prepaid sales rebates	$	658	$	—
Prepaid outsourced sales team		606		—
Rent receivable		165		—
Prepaid research and development services		123		—
Prepaid rent		120		—
Other		294		261
Total prepaid expenses and other current assets	$	1,966	$	261

XML

Note 5 - Inventory

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Inventory Disclosure [Text Block]

NOTE

5.

INVENTORY

Inventory consisted of the following:

(in thousands)	December 31, 2016			December 31, 2015
Raw materials and supplies	$	514		$	660
Goods in process		—			248
Finished goods		555			482
Less: Reserve for excess and obsolete inventory		(196	)		(45	)
Total inventory, net	$	873		$	1,345

XML

Note 6 - Property and Equipment

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

NOTE

6.

PROPERTY AND EQUIPMENT 

Property and equipment consisted of the following:

(in thousands)	December 31, 2016			December 31, 2015
Office and laboratory equipment	$	24		$	1,528
Furniture and fixtures		153			169
Computer equipment and software		170			122
Production equipment		105			105
Leasehold improvements		68			173
Total property and equipment, at cost		520			2,097
Less: accumulated depreciation and amortization		(149	)		(1,702	)
Total property and equipment, net	$	371		$	395

In the quarter ended

September

30,

2016,

the Company sub-leased its prior headquarters and determined that its leasehold improvements were impaired. This resulted in a

$66

thousand impairment charge recorded to general and administrative expense in the consolidate statement of operation and comprehensive loss for the year ended

December

31,

 

2016.

In the quarter ended

September

30,

2016,

the Company transferred title to a significant portion of its lab equipment in exchange for research and development services. As a result, the Company recognized a

$232

thousand gain on the sales of these assets, which was recorded to research and development expense in the consolidate statement of operation and comprehensive loss for the year ended

December

31,

 

2016.

In the quarter ended

December

31

2016,

the Company disposed of damaged, unusable and full depreciated property and equipment. As a result, the Company recognized a

$13

thousand loss on the disposal of these assets, and a

$4

thousand impairment charge, which were recorded to general and administrative expense in the consolidate statement of operation and comprehensive loss for the year ended

December

31,

 

2016.

Depreciation and amortization expense was

$114

thousand,

$164

thousand,

$232

thousand for the years ended

December

31,

2016,

2015

and

2014,

respectively.

XML

Note 7 - Accrued Liabilities

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

NOTE

7.

ACCRUED LIABILITIES 

Accrued liabilities consisted of the following:

(in thousands)	December 31, 2016		December 31, 2015
Research and development	$	2	$	394
Employee payroll and benefits		763		414
Severance pay		250		790
Sales rebates		166		150
Outsourced sales team		333		—
Inventory		75		—
Other		212		232
Total accrued liabilities	$	1,801	$	1,980

XML

Note 8 - Related Party Notes Payable

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Related Party Notes Payable [Text Block]

NOTE

8.

RELATED PARTY NOTES PAYABLE

Beginning on

December

30,

2015,

the Company entered into a series of agreements pursuant to a loan (the “Loan”) facilitated by China Kington Asset Management Co. Ltd. (“China Kington”). In connection with the Loan, the Company issued

five

(5)

 promissory notes (the “Notes”) payable to Mr. Mark Sieczkarek, the Gail J. Maderis Revocable Trust, Dr. T. Alex McPherson, Mr. Jian Ping Fu, and Pioneer Pharma (Singapore) Pte. Ltd. (“Pioneer Singapore”)(collectively, the “Lenders”), loaning the Company an aggregate of

$3.0

million. Specifically, Mr. Sieczkarek, Chairman of the Board of Directors of the Company (the “Board”) and President and Chief Executive Officer of the Company, loaned the Company

$199

thousand; the Gail J. Maderis Revocable Trust, on behalf of Ms. Maderis, a Director of the Company, loaned the Company

$71

thousand; Dr. McPherson, a Director of the Company, loaned the Company

$20

thousand; Pioneer Singapore loaned the Company

$1.4

million; and Mr. Fu loaned the Company

$1.4

million. China Pioneer, Pioneer Hong Kong (who now holds all of the holdings of Pioneer Singapore due to a recent internal corporate reorganization) and Mr. Fu are the Company's

two

largest stockholders. All Notes were issued on

December

30,

2015

except the Note payable to Mr. Fu, which was issued on

January

12,

2016.

The proceeds from the Notes were used for general corporate purposes. Minimumquarterly payments of principal and interest began on

March

31,

2016

and were scheduled to continue on the last day of each of

June,

September,

December

and

March

thereafter. The entire principal sum and any and all accrued and unpaid interest was payable in full upon the Company’s next financing, subsequent to the dates of the Notes, but in no event would the term of the Loan extend beyond

December

30,

2018,

except for the loan by Mr. Fu, the term of which was to extend

three

(3)

years from the date of issuance. The Notes carried an interest rate of

six

percent

(6%)

per annum and could be prepaid in whole or in part at any time without premium or penalty.

In connection with the Notes, China Kington agreed to act as collateral agent for the benefit of the Lenders, in accordance with the terms of a collateral agency and intercreditor agreement (the “Collateral Agency Agreement”), which was entered into on

December

30,

2015

between China Kington and the Lenders. To secure the Notes, China Kington perfected a security interest in all tangible and intangible assets of the Company, pursuant to a security agreement (the “Security Agreement”

)

between the Company and China Kington, which was entered into on

December

30,

2015.

As consideration to China Kington for facilitating the Loan, the Company agreed to the following:

(1)

the grant of a

first

right of refusal for China Kington (or its designee that shall be acceptable to the Company in its reasonable discretion) to lead financings for the Company for a period that is the shorter of

two

(2)

years or the day that the Company’s cash flow has been equal to or greater than

$0

in each month for

three

(3)

consecutive months, subject to certain limitations;

(2)

the participation of Mr. Sieczkarek as a Lender in the financing;

(3)

the participation of the Board, management and investors that the Board and management provide, to contribute an aggregate

nine

percent

(9%)

of funds in the Company’s next financing;

(4)

the appointment of

two

new members to the Company’s Board by China Kington; and

(5)

the Company’s agreement to reasonably cooperate with reasonable requests made by an auditor engaged, and paid for, by China Kington, subject to certain limitations. Upon the recommendation of China Kington, and after reviewing their relevant experiences and background and discussing the same, on

January

26,

2016

the Board of Directors unanimously appointed Mr. Mijia “Bob” Wu and Mr. Xiaoyan “Henry” Liu to serve as Class I and Class III members of the Board, respectively.Because Bob Wu is the Managing Director of China Kington, China Kington became a related party upon his appointment to the Board.

Upon closing the

first

tranche of an

$11.8

million private placement on

May

6,

2016

and by agreement with the Lenders, the Company used

$2.5

million of the proceeds from the private placement to repay principal on the Notes issued to the Lenders.

Upon closing the

second

tranche of such

$11.8

million private placement on

August

1,

2016,

the Company repaid the remaining principal on the Notes in the amount of

$520

thousand.

As of

December

31,

2016,

outstanding amounts under these Notes was

zero.

XML

Note 9 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

NOTE

9.

COMMITMENTS AND CONTINGENCIES

Operating Leases

On

August

24,

2016,

the Company entered into an Office Lease (the “Lease”), pursuant to which the Company leased approximately

7,799

rentable square feet of real property located on the

eleventh

floor (Suite

1150)

at

2000

Powell Street, Emeryville, California

94608

(the “Premises”) from KBSIII Towers at Emeryville, LLC (the “Landlord”), for the Company’s new principal executive offices. The expiration date of the Lease is

February

28,

2022,

unless earlier terminated pursuant to any provision of the Lease. The Company also has the option to extend the term of the Lease for

one

five

(5)

-year period upon written notice to the Landlord which is no earlier than

twelve

(12)

months and no later than

nine

(9)

months prior to the expiration of the then current term. The effective monthly base rental rate for the

first

twelve

(12)

months of the Lease is

$4.15

per square foot

($338,390

annually), and increases approximately

three

percent

(3%)

every

eleven

(11)

months thereafter beginning with the

thirteenth

(13

th

) month of the Lease, with a maximum monthly rental rate of

$4.81

per square foot

($450,250

annually) for months

sixty

-

one

(61)

to

sixty

-

three

(63)

of the Lease. The Company will also be responsible for its share of the direct expenses of the Premises, or

2.16%,

which includes certain additional operating expenses, utilities costs and tax expenses. The Landlord has agreed to abate all of the Company’s monthly base rental payments for the

first

three

(3)

full calendar months of the Lease. The Company was also required to provide a standby letter of credit (the “Letter of Credit”) as security for performance of its obligations and for all losses and damages the Landlord

may

suffer as a result of any default by the Company under the Lease in the initial amount of

$323,658,

which is secured by a certificate of deposit and is recorded in other assets. Provided that no default occurs under the terms of the Lease, and certain financial requirements are met, the Company will be entitled to periodically reduce the amount of the Letter of Credit down to a maximum of approximately

$151,823

as of the last day of the

sixtieth

(60

th

) full calendar month of the Lease.

The Company also leases laboratory facilities and office space at Suite

550,

EmeryStation North Building,

5980

Horton Street, Emeryville, California (“EmeryStation”) under an operating lease which will expire on

October

21,

2020.

On

July

11,

2016,

the Company entered into a Sublease Agreement to sublease all

16,465

rentable square feet of real property at EmeryStation (the “Sublease Agreement”) that the Company currently leases at Emery Station. The commencement date under the Sublease Agreement was

September

8,

2016.

The expiration date of the Sublease Agreement is

October

21,

2020,

the expiration date of the Company’s lease for the Emery Station Premises, unless earlier terminated pursuant to any provision of the Company’s lease for EmeryStation, as amended, or the Sublease Agreement. As a result of the sublease, the Company recorded a non-cash loss of

$40

thousand, and an impairment to leasehold improvements of

$66

thousand, which were recorded to general and administrative expense.

Rent expense, net was

$938

thousand,

$1,008

thousand, and

$1,045

thousand for the years ended

December

31,

2016,

2015

and

2014,

respectively. The future minimum lease payments under these non-cancellable operating leases were as follows as of

December

 

31,

2016:

(in thousands)	Lease Commitment
Year ending December 31:
2017	$	987
2018		1,083
2019		1,116
2020		1,026
2021		438
Thereafter		75
Total lease commitment	$	4,725

The Company’s monthly rent payments fluctuate under the master lease agreements. In accordance with U.S. GAAP, the Company recognizes rent expense on a straight-line basis, and records deferred rent for the difference between the amounts paid and recorded as expense. At

December

31,

2016

and

2015,

the Company had

$327

thousand and

$189

thousand of deferred rent, respectively.

Sub-lease rental reimbursement in not deducted from the above table. The Company anticipates collecting

$709

thousand,

$609

thousand,

$690

thousand, and

$576

thousand in the years ending

December

31,

2017,

2018,

2019,

and

2020,

respectively.

Directors and Officers Indemnity

As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director or officer insurance policy that limits its exposure and

may

enable it to recover a portion of any future payments. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, it has not recorded any liabilities for these agreements as of

December

 

31,

2016.

In the normal course of business, the Company provides indemnifications of varying scope under its agreements with other companies, typically its clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with use or testing of its products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any

third

party with respect to its products. The term of these indemnification agreements is generally perpetual. The potential future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. The Company also maintains various liability insurance policies that limit its exposure. As a result, it believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of

December

 

31,

2016.

Legal Matters

From time to time, the Company

may

be involved in various legal proceedings arising in the ordinary course of business. There are no matters at

December

31,

2016,

that, in the opinion of management, would have a material adverse effect on our financial position, results of operations or cash flows.

XML

Note 10 - Warrant Liability

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Other Liabilities Disclosure [Text Block]

NOTE

10.

WARRANT LIABILITY

In

July

2011,

the Company sold common stock and warrants in a registered direct financing. As part of this transaction, 

139,520

warrants were issued with an exercise price of

$33.25

and were exercisable from

January

1,

2012

to

July

5,

2016.

The terms of the warrants require registered shares to be delivered upon each warrant’s exercise and also require possible cash payments to the warrant holders (in lieu of the warrant’s exercise) upon specified fundamental transactions involving the Company’s common stock, such as in an acquisition of the Company. Under ASC

480,

Distinguishing Liabilities from Equity,the Company’s ability to deliver registered shares upon an exercise of the warrants and the Company’s potential obligation to cash-settle the warrants if specified fundamental transactions occur are deemed to be beyond the Company’s control. The warrants contain a provision according to which the warrant holder would have the option to receive cash, equal to the Black Scholes fair value of the remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC

480

requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss. The Lattice model provides for assumptions regarding volatility and risk-free interest rates within the total period to maturity. In addition, after

January

5,

2012,

and if the closing bid price per share of the common stock in the principal market equals or exceeds

$66.50

for any

ten

trading days (which do not have to be consecutive) in a period of

fifteen

consecutive trading days, the Company has the right to require the exercise of

one

-

third

of the warrants then held by the warrant holders.

In

October

2015,

the holders of all warrants issued pursuant to the Company’s securities purchase agreement dated

March

3,

2015

(the

“2015

Securities Purchase Agreement”) agreed to reduce the length of notice required to such investors prior to the Company’s issuance of new securities from

twenty

business days to

two

business days, for the remainder of such investors’ pre-emptive right period (which expired

March

3,

2016).

The Company entered into these agreements to enable it to expeditiously raise capital in the

October

2015

Offering (as described below) and future offerings. As consideration for these agreements, the Company amended certain provisions of both the warrants with a

15

-month term (the “Short-Term Warrants”) and warrants with a

five

-year term (the “Long-Term Warrants”) issued pursuant to the

2015

Securities Purchase Agreement (together, the

“March

2015

Warrants”) and the warrants issued pursuant to the placement agent agreement dated

June

29,

2011

(the

“July

2011

Warrants”). Specifically, the amendments decreased the exercise price for both the

March

2015

Warrants and the

July

2011

Warrants to

$5.00

per share. In addition, the amendments extended the exercise expiration date for the Short-Term Warrants and the

July

2011

Warrants to

March

6,

2020.

A price protection provision also was added to both the

July

2011

Warrants and

March

2015

Warrants, such that if the Company subsequently sells or otherwise disposes of Company common stock at a lower price per share than

$5.00

or any securities exchangeable for common stock with a lower exercise price than

$5.00,

the exercise price of such warrants will be reduced to that lower price.

In

October

2015,

the Company also entered into an underwriting agreement with Roth Capital Partners, LLC, relating to the public offering and sale of up to (i) 

492,000

shares of the Company’s common stock; and (ii) warrants to purchase up to 

442,802

shares of the Company’s common stock (the

“October

2015

Warrants”) with an exercise price of

$5.00

per share (the

“October

2015

Offering”).

In

February

2016,

the strike price of the

July

2011,

March

2015

and

October

2015

warrants was reduced to

$1.81

per share, pursuant to the price protection provisions in such warrants, because the Company sold common stock to Mr. Jian Ping Fu at that price.

The Company evaluated the change in terms of the

July

2011

Warrants and noted that the change in terms resulted in a revaluation at the time of the change. The warrants were re-issued and valued as of

October

27,

2015

at

$360,821

with the new terms, and a modification expense was recorded for the difference between the fair value of the warrants at their new terms after modification on

October

27,

2015

and the fair value of the warrants at their original terms prior to modification as of

October

27,

2015.

The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operation and comprehensive loss.

The key assumptions used to value the warrants after the modification at

October

27,

2015

were as follows:

Assumption
Expected price volatility		80.00	%
Expected term (in years)		4.36
Risk-free interest rate		1.23	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.60

The shares of common stock and warrants were issued separately. Each warrant was exercisable immediately upon issuance and will expire

60

months from the date of issuance. The price to the public in the

October

2015

Offering was

$5.00

per share of common stock and related warrant. The net proceeds to the Company were approximately 

$2.1

million after deducting underwriting discounts and commissions and offering expenses.

The key assumptions used to value the warrant at

December

31,

2016

and

December

31,

2015

were as follows:

	Year Ended December 31,
Assumption	2016			2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.55		$	1.10

In

March

2015,

the Company issued both the Short-Term Warrants

($15.00

per share exercise price) and the Long-Term Warrants

($16.25

per share exercise price). At that time, the Company determined that these warrants qualified for equity accounting and did not contain embedded derivatives that required bifurcation. After the Company’s agreement to modify the terms of the

March

2015

Warrants and

July

2011

Warrants in

October

2015,

the Company evaluated the change in terms of the

March

2015

Warrants and noted that the change in terms resulted in liability classification of both the Short-Term and Long-Term Warrants. The

March

2015

Warrants were re-issued and valued as of

October

27,

2015

at a total of

$1.8

million with the new terms, and a modification expense was recorded at the difference between the fair value of the warrants on their new terms after modification as of

October

27,

2015

and the fair value of the warrants on their original terms prior to modification as of

October

27,

2015.

The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss.

The key assumptions used to value the Short-Term and Long-Term Warrants after modification at

October

27,

2015

were as follows:

Assumption
Expected price volatility		80.00	%
Expected term (in years)		4.36
Risk-free interest rate		1.23	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.78

The key assumptions used to value the Short-Term Warrants as of

December

31,

2016,

and

December

31,

2015

were as follows:

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.47		$	1.16

The key assumptions used to value the Long-Term Warrants as of

December

31,

2016,

and

December

31,

2015

were as follows:

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.55		$	1.16

As noted above, the Company issued warrants in connection with the

October

2015

Offering. The Company evaluated the terms of the

October

2015

Warrants and noted that under ASC

480,

the Company’s potential obligation to cash-settle the warrants if specified fundamental transactions occur are deemed to be beyond the Company’s control. Due to this provision, ASC

480

requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss. The fair value of the warrants at issuance on

October

27,

2015

was

$1.3

million.

The key assumptions used to initially value the

October

2015

warrants at

October

27,

2015

were as follows:

Assumption
Expected price volatility		75.50	%
Expected term (in years)		5.00
Risk-free interest rate		1.38	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.82

The key assumptions used to value the warrants as of

December

31,

2016,

and

December

31,

2015

were as follows:

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		96.00	%		77.50	%
Expected term (in years)		3.83			4.83
Risk-free interest rate		1.66	%		1.72	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.60		$	1.21

During the

third

quarter of

2016,

a total of

3,613,284

warrants to purchase

3,613,284

shares of common stock were exercised related to the

July

2011,

March

2015

and

October

2015

warrants resulting in gross proceeds of

$6.9

million. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of

$1.6

million, with any change in fair value recorded in the consolidated income statement and comprehensive loss. The

$1.6

million fair value was subsequently transferred to equity as of the date of their exercise.

During the

fourth

quarter of

2016,

a total of

363,523

warrants to purchase

363,523

shares of common stock were exercised related to the

October

2011,

November

2015

and

December

2015

warrants resulting in gross proceeds of

$0.9

million. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of

$0.5

million, with any change in fair value recorded in the consolidated income statement and comprehensive loss. The

$0.5

million fair value was subsequently transferred to equity as of the date of their exercise.

The details of all outstanding warrant liability as of

December

31,

2016,

were as follows:

Shares and dollars in thousands	Shares		Warrant Liability
July 2011 Warrants		49	$	126
Long-Term Warrants		105		267
Short-Term Warrants		127		312
October 2015 Warrants		284		741
		565	$	1,446

XML

Note 11 - Stockholders' Equity (Deficit)

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

NOTE

11.

STOCKHOLDERS’ EQUITY (DEFICIT)

Amendments to Articles of Incorporation – Reverse Stock Split

Effective

December

11,

2015,

the Company amended its Certificate of Incorporation to effect a

1

-for-

25

reverse split of its outstanding common stock which was approved by our stockholders on

December

11,

2015.

The accompanying financial statements and related notes give retroactive effect to this reverse stock split.

Preferred Stock

Under the Company’s amended articles of incorporation, the Company is authorized to issue of up to

5,000,000

shares of preferred stock in such series and with such rights and preferences as

may

be approved by the board of directors. As of

December

31,

2016

and

December

31,

2015,

there were no shares of preferred stock outstanding.

Common Stock

On

March

25,

2014,

the Company closed a public offering for the sale of 

224,000

units, each unit consisting of (i)

one

share of common stock and (ii)

one

warrant to purchase

6.25

shares of common stock (or a total of 

56,000

shares), at a purchase price of

$30.00

per unit. The warrants were immediately exercisable for

$39.00

per share expired

eighteen

months from the date of issuance. All of the shares of common stock and warrants issued in the offering (and the shares of common stock issuable upon exercise of the warrants) were offered pursuant to a shelf registration statement filed with, and declared effective by, the Securities and Exchange Commission. The shares of common stock and the warrants were immediately separable and were issued separately, but were purchased together.  The Company raised a total of

$6.7

million from this offering, or approximately

$6.0

million in net proceeds after deducting underwriting commissions of

$470

thousand and other offering costs of

$211

thousand.

On

October

16,

2014,

the Company entered into an At-The-Market Offering Agreement (the

“2014

ATM Agreement”) with Ascendiant under which it

may

offer and sell its common stock having aggregate sales proceeds of up to

$10.0

million from time to time through Ascendiant as its sales agent. Sales of Company common stock through Ascendiant are made by means of ordinary brokers’ transactions on the NYSE MKT or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by the Company and Ascendiant. Ascendiant uses commercially reasonable efforts to sell Company common stock from time to time, based upon instructions from it (including any price, time or size limits or other customary parameters or conditions it

may

impose). The Company pays Ascendiant a commission of

3.0%

of the gross sales proceeds of any common stock sold through Ascendiant under the

2014

ATM Agreement. The Company has also provided Ascendiant with customary indemnification rights. In connection with the

2014

ATM Agreement, the Company terminated its existing At-The-Market Offering Agreement with Ascendiant dated

November

13,

2013.

The Company is not obligated to make any sales of common stock under the

2014

ATM Agreement. The offering of shares of the Company’s common stock pursuant to the

2014

ATM Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the

2014

ATM Agreement, or (ii) termination of the

2014

ATM Agreement in accordance with its terms.

Pursuant to the

2014

ATM Agreement, the Company sold

1.3

million shares for gross proceeds of

$1.2

million, or approximately

$1.1

million in net proceeds after deducting offering costs and commissions of

$81

thousand.  

On

March

6,

2015,

the Company closed a private placement offering of an aggregate of 

370,993

immediately separable units, which included 

370,933

shares of the Company’s common stock, 

278,200

Long-Term Warrants and 

370,933

Short-Term Warrants (the

“March

Offering”). The per unit purchase price was

$12.50

for outside investors and

$15.00

for Company insiders, and the exercise prices for the

15

-month warrants and

5

-year warrants were

$15.00

and

$16.25

per share, respectively. Also on

March

6,

2015,

the Company entered into a registration rights agreement with the purchasers, pursuant to which the Company agreed to file as many registration statements with the Securities and Exchange Commission (the “SEC”) as

may

be necessary to cover the resale of the shares of Company common stock issued in the offering, including those shares underlying the

March

2015

Warrants, and to keep such registration statements effective for the terms defined therein. The Company raised a total of

$4.7

million from this offering, or approximately

$4.5

million in net proceeds after deducting offering costs of

$200

thousand.

On

May

22,

2015,

the Company closed a private placement offering of an aggregate of 

435,746

shares of the Company’s common stock and 

217,873

warrants with a

12

-month term (the

“May

Offering”). The purchase price for a share of Company common stock and related warrant was

$15.75,

and the exercise price for the warrants was

$19.50

per share.  On

May

18,

2015,

the Company entered into a registration rights agreement with the purchasers, pursuant to which the Company agreed to use best efforts to file as many registration statements with the SEC as

may

be necessary to cover the resale of the shares of Company common stock issued in the offering, including those shares underlying the warrants, and to keep such registration statements effective for the terms defined therein. In connection with the

May

Offering, the Company agreed to enter into an additional definitive securities purchase agreement with the purchasers in the

March

Offering. In exchange for a waiver of certain pre-emptive rights granted to the purchasers in the

March

Offering, an additional

635,000

shares of Company common stock were issued to such purchasers (other than entities affiliated with the Company). The Company raised a total of

$7.3

million from this offering, or approximately

$6.4

million in net proceeds after deducting offering costs of

$900

thousand. China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to

six

percent

(6%)

of the gross proceeds received by the Company upon closing pursuant to the purchases non US citizens. The amount of such commission was approximately

$408

thousand, and was included in the offering costs noted above.

On

October

27,

2015,

pursuant to an underwriting agreement with Roth Capital Partners, LLC, the Company closed a public offering of (i) 

492,000

shares of the Company’s common stock; and (ii) warrants to purchase up to 

468,280

shares of the Company’s common stock with an exercise price of

$5.00

per share (the

“October

2015

Warrants”). The shares of common stock and

October

2015

Warrants were issued separately. Each

October

2015

Warrant was exercisable immediately upon issuance and will expire

60

months from the date of issuance. The price to the public in this offering was

$5.00

per share of common stock and related

October

2015

Warrant. The Company raised a total of

$2.3

million from this offering, or approximately

$1.9

million in net proceeds after deducting underwriting discounts and offering costs of

$400

thousand.

In

February

2016,

the Company entered into

three

securities purchase agreements (the “Purchase Agreements”) for the sale of an aggregate of

1,518,567

shares of the Company’s common stock (the “Common Stock”) to accredited investors for a total of

$2.8

million. The Company entered into the

first

purchase agreement with Mr. Jian Ping Fu (the “Fu Agreement”), pursuant to which the Company agreed to issue and sell to Mr. Fu

696,590

shares of Common Stock, at a per share price of

$1.81,

which was a

five

percent

(5%)

discount to the closing price of the Common Stock on

February

16,

2016,

the date of the Fu Agreement. The Company entered into the

second

purchase agreement with Pioneer Singapore (the “Pioneer Agreement”), pursuant to which the Company agreed to issue and sell to Pioneer Singapore

696,590

shares of Common Stock, at a per share price of

$1.91,

which was the closing price of the Common Stock on

February

16,

2016

with no discount. The Company entered into a

third

purchase agreement with Mark M. Sieczkarek (the “Sieczkarek Agreement”), pursuant to which the Company agreed to issue and sell to Mr. Sieczkarek

125,387

shares of Common Stock, at a per share price of

$1.91,

which was the closing price of the Common Stock on

February

16,

2016

with no discount. The Common Stock issued by the Company pursuant to the Purchase Agreements has not been registered under the Securities Act and

may

not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to

six

percent

(6%)

of the gross proceeds received by the Company upon closing pursuant to the purchases by Pioneer Singapore and Mr. Fu. The amount of such commission was approximately

$155

thousand.

On

April

4,

2016,

the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) for the sale of an aggregate

6,173,299

shares of Common Stock, par value

$0.01

per share and warrants (the

“April

2016

Warrants”) exercisable for

3,086,651

Shares to accredited investors for an aggregate purchase price of

$11.8

million (the “Private Placement”). The warrants have a

4

-year term and an exercise price of

$1.91,

callable by the Company if the closing price of the Common Stock, as reported on the NYSE MKT, is

$4.00

or greater for

five

sequential trading days. The Private Placement closed in

two

tranches, the

first

of which closed on

May

5,

2016,

resulting in proceeds to the Company of

$7.8

million (the “Primary Closing”), and the

second

of which closed on

August

1,

2016,

resulting in proceeds of

$4.0

million to the Company (the “Secondary Closing”). In the Primary Closing, the Company issued

4,079,058

shares of Common Stock and

April

2016

Warrants exercisable for

2,039,530

shares of Common Stock. In the Secondary Closing, the Company issued

2,094,241

shares of Common Stock and

April

2016

Warrants exercisable for

1,047,121

shares of Common Stock. Both the Primary Closing and the Secondary Closing were subject to the same terms, containing customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Purchasers (as defined below) and other obligations of the parties and termination provisions.

China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to

six

percent

(6%)

of the gross proceeds received by the Company upon closing pursuant to the purchases by certain investors. The amount of such commission was approximately

$618

thousand.

Also on

April

4,

2016,

the Company entered into a separate registration rights agreement (the “Registration Rights Agreement”) with Messrs. Andros and Geckler, Dr. Rider, and the Children’s Brain Disease Foundation (the “Participating Purchasers”), pursuant to which the Company agreed to file as many registration statements with the SEC as

may

be necessary to cover the resale of the shares and the

April

2016

Warrants held by the Participating Purchasers, to use its commercially reasonable efforts to have all such registration statements declared effective within the time frames set forth in the Securities Purchase Agreement and the Registration Rights Agreement, and to keep such registration statements effective for the terms defined therein. The Company filed such Registration Statement to cover the resale of the shares and

April

2016

Warrants held by the Participating Purchasers with the SEC on

June

9,

2016

and received effectiveness of such Registration Statement on

June

20,

2016

(Registration Number

333

-

211943).

During the

third

quarter of

2016,

the Company recorded

$6.6

million in net proceeds upon the exercise of

3,613,284

of the Company’s warrants for

3,613,284

shares of the Company’s Common Stock, including all of the warrants issued in

May

2016

and

August

2016.

As consideration for the facilitation of the exercise of certain of these warrants held by non-U.S. citizens domiciled outside of the United States, China Kington received a

six

percent

(6%)

commission on the aggregate proceeds to the Company pursuant to such exercises. The amount of such commission was approximately

$338

thousand.

During the

fourth

quarter of

2016,

the Company recorded

$0.9

million in net proceeds upon the exercise of

363,523

of the Company’s warrants for

363,523

shares of the Company’s Common Stock. As consideration for the facilitation of the exercise of certain of these warrants held by non-U.S. citizens domiciled outside of the United States, China Kington received a

six

percent

(6%)

commission on the aggregate proceeds to the Company pursuant to such exercises. The amount of such commission was approximately

$32

thousand.

Stock Warrants

In

July

2011,

 

139,520

warrants were issued in connection with our

July

2011

registered direct financing. These warrants were issued with an exercise price of

$33.25

and were set to expire on

July

5,

2016.

In

October

2015,

the exercise expiration date was extended until

March

6,

2020.

Outstanding warrants were exercisable at

December

31,

2016.

See Note

10

for further details on these warrants.

In

March

2015,

the Company issued 

278,200

Long-Term Warrants and 

370,933

Short-Term Warrants. Outstanding

March

2015

Warrants were exercisable at

December

31,

2016.

See Note

10

for further details on these warrants.

In

May

2015,

the Company issued 

217,873

warrants with a

12

-month term and an exercise price of

$19.50

per share. The warrants became exercisable at any time on or after

November

22,

2015,

six

months from the date of issuance, and will continue to be exercisable for

one

year thereafter. These outstanding warrants were exercisable at

December

31,

2015.

See Note

10

for further details on these warrants.

In

October

2015,

the Company issued warrants to purchase up to 

442,800

shares of the Company’s common stock with an exercise price of

$5.00

per share. Each warrant was exercisable immediately upon issuance and will expire

60

months from the date of issuance. A price protection provision was included in such warrants, such that if the Company subsequently sells or otherwise disposes of Company common stock at a lower price per share than

$5.00

or any securities exchangeable for common stock with a lower exercise price than

$5.00,

the exercise price of such warrants will be reduced to that lower price. See Note

10

for further details on these warrants. 

In

February

2016,

the strike prices of the

July

2011,

March

2015

Short-Term and Long-Term, and

October

2015

warrants were reduced to

$1.81

per share, pursuant to the price protection provisions in such warrants, because the Company sold common stock to Mr. Jian Ping Fu at that price.

In

May

2016,

the Company issued

2,039,530

warrants at the Primary Closing pursuant to the Securities Purchase Agreement. Please see the preceding subsection, “Common Stock,” for further details.

In

August

2016,

the Company issued

1,047,121

warrants at the Secondary Closing pursuant to the Securities Purchase Agreement. Please see the preceding subsection, “Common Stock,” for further details.

Effective

September

29,

2016,

the Company modified the exercise price of all warrants issued pursuant to the securities purchase agreement, dated

May

18,

2015,

from

$19.50

to

$3.15

per share, which reflected a discount of approximately

sixteen

percent

(16%)

to the closing price of the Company’s Common Stock on

September

27,

2016.

The Company has estimated the value of warrant modification as of the date of the modification by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. As a result of this modification, the Company recorded a non-cash loss of

$270

thousand in general and administrative expense in the consolidate statement of operation and comprehensive loss.

The following table summarizes information about the Company’s warrants outstanding at

December

31,

2016,

2015

and

2014,

and activity during the

three

years then ended.  

(in thousands)	Warrants			Weighted- Average Exercise Price
Outstanding at December 31, 2013		192		$	43.00
Warrants granted		55		$	39.00
Warrants expired		(50	)	$	68.75
Outstanding at December 31, 2014		197		$	35.23
Warrants granted		1,317		$	7.40
Warrants expired		(56	)	$	39.00
Outstanding at December 31, 2015		1,458		$	5.19
Warrants granted		3,087		$	1.91
Warrants exercised		(3,977	)	$	1.95
Warrants expired		(3	)	$	78.13
Outstanding at December 31, 2016		565		$	1.81

XML

Note 12 - Equity-based Compensation

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE

12.

EQUITY-BASED COMPENSATION

Equity Compensation Plans

In

October

2007,

the Company adopted the

2007

Omnibus Incentive Plan (the

“2007

Plan”) to provide for the granting of stock awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the board of directors. At the inception of the

2007

Plan, 

40,000

shares were reserved for issuance under the

2007

Plan.  

For the years from

2009

to

2012,

the number of shares of common stock authorized for issuance under the

2007

Plan increased annually in an amount equal to the lesser of (a) 

40,000

shares; (b)

4%

of the number of shares of the Company’s common stock outstanding on the last day of the preceding year; or (c) such lesser number as determined by the Board.  Accordingly, an additional

40,000,

37,427,

and 

37,207

shares of common stock were authorized for issuance under the

2007

Plan in

January

2012,

2011

and

2010,

respectively. Beginning in

2013,

the shareholders voted to remove the 

40,000

share cap and the

2007

Plan increases annually by

4%

of the number of shares of the Company’s common stock outstanding on the last day of the preceding year. Accordingly, an additional 

32,646

and 

59,157

shares of common stock were authorized for issuance under the

2007

Plan in

January

2014

and

2013,

respectively. On

March

30

th

,

2015,

the Company filed a registration statement to add an additional 

82,461

shares to the

2007

Plan. In

January

2016,

the Company added

139,449

shares to the Plan, per the Plan’s evergreen provision. On

May

26,

2016,

the stockholders of the Company approved an amendment to the

2007

Plan to increase the number of shares of Company common stock reserved for issuance thereunder by

1,124,826

shares. The aggregate reserved number of shares available under the

2007

Plan is

2,318,486

shares. As of 

December

31,

2016,

there were

53,587

shares available for future grant under the

2007

Plan.

Under the terms of the

2007

Plan, the exercise price of incentive stock options

may

not be less than

100%

of the fair value of the common stock on the date of grant and, if granted to an owner of more than

10%

of the Company’s stock, then not less than

110%.

Stock options granted under the

2007

Plan expire no later than

ten

years from the date of grant. Stock options granted to employees generally vest over

four

years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service. Any options granted prior to

October

2007

include early exercise provisions that allow for full exercise of the option prior to the option vesting, subject to certain repurchase provisions. The Company issues new shares to satisfy option exercises under the plans. 

Stock Based Compensation Summary

The following table summarizes information about the Company’s stock options and restricted stock outstanding at

December

31,

2016,

2015

and

2014,

and activity during the

three

years then ended:

(in thousands, except years and per share data)	Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2013		287		$	42.00		6.6		422
Options granted		68		$	22.50
Restricted stock units granted		3		$	—
Options exercised		(2	)	$	14.00
Restricted stock units vested		(4	)	$	—
Options forfeited/cancelled		(29	)	$	36.50
Outstanding at December 31, 2014		323		$	38.25		6.3		23
Options granted		85		$	11.20
Restricted stock units granted		16		$	—
Options exercised		-		$	—
Restricted stock units vested		(6	)	$	—
Options forfeited/cancelled		(28	)	$	30.58
Restricted stock units cancelled		(2	)	$	—
Outstanding at December 31, 2015		388		$	32.03		6.2		19
Options granted		1,227		$	2.74
Restricted stock units granted		104		$	—
Options exercised		-		$	—
Restricted stock units vested		(114	)	$	—
Options forfeited/cancelled		(116	)	$	28.27
Restricted stock units cancelled		-		$	—
Outstanding at December 31, 2016		1,489		$	8.38		8.7	$	702
Vested and expected to vest at December 31, 2016		1,466		$	8.45		8.6	$	691
Vested at December 31, 2016		402		$	22.45		6.6	$	—
Exercisable at December 31, 2016		402		$	22.45		6.6	$	—

For options that have a quoted market price in excess of the exercise price (“in-the-money options”), the aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE MKT as of

December

31,

2016.

There were

no

stock options exercised during the year ended

December

31,

2016.

The Company received

no

cash payments for the exercise of stock options during the years ended

December

31,

2016

and

December

31,

2015.

The Company received

$34

thousand in cash payments for the exercise of stock options during the year ended

December

31,

2014.

The aggregate intrinsic value of stock option awards exercised was

$0,

$4

thousand and

$32

thousand for the years ended

December

31,

2016,

2015

and

2014,

respectively, as determined at the date of option exercise.

As of

December

31,

2016,

total unrecognized compensation cost related to unvested stock options and restricted stock was

$1.5

million. This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive loss over the remaining weighted average vesting period of

2.02

years.

Stock Option Awards to Employees and Directors

The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted. The Company has estimated the value of stock option awards as of the date of grant by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. See Note

2

for a description of the accounting policies that the Company applies to value its stock-based awards.

During the years ended

December

31,

2016,

2015

and

2014,

the Company granted options to employees and directors to purchase an aggregate of

1,139,000,

59,000

and

52,000

shares of common stock, respectively.

The weighted average assumptions used in determining the value of options granted and a summary of the methodology applied to develop each assumption are as follows:

	Year Ended December 31,
Assumption	2016			2015			2014
Expected price volatility		84.47	%		77.22	%		76.88	%
Expected term (in years)		7.03			6.8			6.5
Risk-free interest rate		1.57	%		1.76	%		2.06	%
Dividend yield		0.00	%		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	2.06		$	7.35		$	15.25

Expected Price Volatility

—This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock and comparable companies from a representative peer group selected based on industry and market capitalization data.

Expected Term

—This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.

Risk-Free Interest Rate

—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.

Dividend Yield

—We have not made any dividend payments nor do we have plans to pay dividends in the foreseeable future.

Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

Additionally, during the years ended

December

31,

2016,

2015

and

2014,

the Company issued

64,000,

16,000

and

2,000

shares of common stock to employees, respectively.

For the years ended

December

31,

2016,

2015

and

2014,

we recognized stock-based compensation expense of

$1,489

thousand,

$1,193

thousand and

$853

thousand, respectively, for option awards to employees and directors.

In the

second

quarter of

2015,

the Company modified stock options owned by

two

of its directors, Mr. Cashion and Mr. Wicks, each of whom retired at the Company’s

2015

annual meeting of stockholders in

June

2015.

All outstanding stock options held by Mr. Cashion and Mr. Wicks became fully vested upon retirement, and the option exercise period for Mr. Cashion and Mr. Wicks was extended from

three

months to

four

years, calculated from the date of retirement. Options with an expiration date prior to the end of the exercise period maintained the same expiration date. In connection with the stock option modification, the Company recognized stock-based compensation expense of

$185

thousand. 

During the

second

and

third

quarters of

2016,

the Company modified stock options held by

two

of its directors, Mr. Radaelli and Mr. McPherson, each of whom resigned as directors of the Company, effective

May

6,

2016

and

August

24,

2016,

respectively. All outstanding stock options held by Mr. Radaelli and Mr. McPherson became fully vested upon retirement, and the option exercise period for Mr. Radaelli and Mr. McPherson was extended from

three

months to

four

years, calculated from each former director’s respective date of resignation. Options with an expiration date prior to the end of the exercise period maintained the same expiration date. In connection with the stock option modification, the Company recognized stock-based compensation expense of

$58

thousand.

Stock-Based Awards to Non-Employees

During the years ended

December

31,

2016,

2015

and

2014,

the Company granted options to purchase an aggregate of

89,000,

27,000,

and

14,000

shares of common stock, respectively, to non-employees in exchange for advisory and consulting services. The stock options are recorded at their fair value on the measurement date and recognized over the respective service or vesting period. The fair value of the stock options granted was calculated using the Black-Scholes-Merton option pricing model based upon the following assumptions:

	Year Ended December 31,
Assumption	2016			2015			2014
Expected price volatility		87.68	%		83.77	%		79.10	%
Expected term (in years)		10.0			9.6			8.6
Risk-free interest rate		1.61	%		2.18	%		2.28	%
Dividend yield		0.00	%		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	2.29		$	7.15		$	15.25

In addition, the Company granted restricted stock to non-employees totaling

41,000,

500

and

600

shares of common stock in the years ended

December

31,

2016,

2015

and

2014,

respectively, in exchange for advisory and consulting services. 

For the years ended

December

31,

2016,

2015

and

2014,

the Company recognized stock-based compensation expense of

$262

thousand,

$188

thousand and

$189

thousand, respectively, related to non-employee options and restricted stock grants.

In

November

2015,

Dr. Ron Najafi resigned from his position as President as CEO of the Company. As part of his separation agreement, in

December

2016,

the Company paid him a portion of the amount due under the agreement via a combination of registered shares and cash during fiscal year

2016.

The expense related to this separation agreement was accrued for and expensed in the year ended

December

31,

2015,

and the shares were issued to him via fully vested restricted stock in

December

2016.

In

January

2017,

the remaining portion of the amount due under the agreement was paid via a combination or registered shard and cash.

In

March

2016,

Roy Wu left the Company as Senior Vice President of Business Development. As part of his separation agreement, in

March

2016,

the Company paid him a combination of stock and cash. The expense related to this separation agreement was accrued for and expensed in the year ended

December

31,

2015

based upon the known terms, and the shares were issued to him via fully vested restricted stock in

March

2016.

Summary of Stock-Based Compensation Expense

A summary of the stock-based compensation expense included in results of operations for the option and stock awards discussed above is as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Research and development	$	195	$	449	$	376
Sales and Marketing		132		-		-
General and administrative		1,424		933		666
Total stock-based compensation expense	$	1,751	$	1,382	$	1,042

Since the Company has operating losses and net operating loss carryforwards, there are no tax benefits associated with stock-based compensation expense.

XML

Note 13 - License, Collaboration and Distribution Agreements

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Collaborative Arrangement Disclosure [Text Block]

NOTE

13.

LICENSE, COLLABORATION AND DISTRIBUTION AGREEMENTS

Virbac

In

April

2012,

the Company entered into a feasibility and option agreement with Virbac, a global animal health company, for the development and potential commercialization of Aganocides for a number of veterinary uses for companion animals. Under the terms of the agreement, NovaBay received an upfront payment and is entitled to additional support for research and development.

In

April

2013,

the Company entered into a collaboration and license agreement with Virbac. Under this new agreement, Virbac acquired exclusive worldwide rights to develop the Company’s proprietary compound, auriclosene (NVC-

422),

for global veterinary markets for companion animals.  The Company received an option exercise fee and

may

receive future development and pre-commercial milestone payments as a result of the collaboration.

Revenue has been recognized under the agreement as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Materials, Equipment, and Contract Study Costs	$	—	$	—	$	39

The Company had deferred revenue balances of

$246

thousand in each of the years ended

December

31,

2016,

2015

and

2014,

related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.

NeutroPhase Distribution Agreements

In

January

2012,

the Company entered into a distribution agreement with China Pioneer Pharma Holdings, Ltd. (“China Pioneer”), a Shanghai-based company that markets high-end pharmaceutical products into China and an affiliate of Pioneer Singapore, for the commercialization of NeutroPhase in this territory. Under the terms of the agreement, NovaBay received an upfront payment of

$312,500.

NovaBay also received

$312,500

in

January

2013,

related to the submission of the

first

marketing approval for the product to the CFDA. The deferred revenue was recognized as the purchase discounts were earned, with the remaining deferred revenue recognized ratably over the product distribution period. During the year ended

December

31,

2014,

NovaBay received

$625,000

upon receipt of a marketing approval of the product from the CFDA.

In

September

2012,

the Company entered into

two

agreements with Pioneer:

(1)

an international distribution agreement (“Distribution Agreement”) and

(2)

a unit purchase agreement (“Purchase Agreement”). These agreements were combined and accounted for as

one

arrangement with

one

unit of accounting for revenue recognition purposes.

Pursuant to the terms of the Distribution Agreement, Pioneer has the right to distribute NeutroPhase, upon a marketing approval from a Regulatory Authority, in certain territories in Asia (other than China). Upon execution of the Distribution Agreement, the Company received an upfront payment, which was recorded as deferred revenue. Pioneer is also obligated to make certain additional payments to the Company upon receipt of the marketing approval. The Distribution Agreement further provides that Pioneer is entitled to a cumulative purchase discount not to exceed

$500,000

upon the purchase of NeutroPhase product, payable in NovaBay unregistered restricted common stock.

Pursuant to the Purchase Agreement, we also received

$2.5

million from Pioneer for the purchase of restricted units (comprising

one

share of common stock and a warrant for the purchase of

one

share of common stock). The unit purchase was completed in

two

tranches:

(1)

800,000

units in

September

2012;

and

(2)

1,200,000

units in

October

2012,

with both tranches at a purchase price of

$1.25

per unit. The fair value of the total units sold was

$3.5

million, based upon the trading price of our common stock on the dates the units were purchased and the fair value of the warrants based on the Black-Scholes Merton option pricing model. Because the aggregate fair value of the units on the dates of purchase exceeded the

$2.5

million in proceeds received from the unit purchase by approximately

$1

million, we reallocated

$600,000

from deferred revenue to stockholders’ equity as consideration for the purchase of the units.  

In

December

2013,

the Company announced it had expanded its NeutroPhase commercial partnership agreement with Pioneer. The expanded agreement includes licensing rights to

two

new products, Avenova and CelleRx, which were developed internally by NovaBay. The expanded partnership agreement covers the commercialization and distribution of these products in China and

11

countries in Southeast Asia.

Revenue has been recognized under these agreements as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	94	$	25	$	47
Product sales		324		70		161
	$	418	$	95	$	208

The Company had deferred revenue balances of

$1.0

million,

$1.1

million, and

$1.2

million, respectively, at

December

31,

2016,

2015

and

2014,

related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.

On

February

7,

2012

the Company to enter into a distribution agreement with Integrated Healing Technologies, LLC, (“IHT”) to distribute NeutroPhase. NovaBay received an upfront payment of

$750,000.

Revenue has been recognized under this agreement as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	21	$	5	$	7
Product sales		332		34		101
	$	353	$	39	$	108

 The Company had deferred revenue balances of

$653

thousand,

$674

thousand, and

$679

thousand, respectively, at

December

31,

2016,

2015

and

2014,

related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.

On

June

1,

2013

the Company to enter into a distribution agreement with Principal Business Enterprise Inc., (“PBE”) to distribute NeutroPhase. NovaBay received an upfront payment of

$200,000.

Revenue has been recognized under this agreement as follows:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	—	$	1	$	4
Product sales		22		66		104
	$	22	$	67	$	108

 The Company had deferred revenue balances of

$194

thousand,

$195

thousand, and

$196

thousand, respectively, at

December

31,

2016,

2015

and

2014,

related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.

Avenova Distribution Agreements

In

November

2014,

the Company signed a nationwide distribution agreement for its Avenova product with McKesson Corporation (“McKesson”) as part of the Company’s commercialization strategy. McKesson makes Avenova widely available in local pharmacies and major retail chains across the U.S., such as Wal-Mart, Costco, CVS and Target. [In

January

2015,

the Company signed a nationwide distribution agreement with Cardinal Health. In

April

2015,

the Company also signed a nationwide distribution agreement with AmerisourceBergen to market Avenova. Since

December

2015,

the Company has signed nationwide distribution agreements with Willow Pharmacy, Allure Pharmacy, Smith Drug Company and Dakota Drug to market Avenova.

During the years ended

December

31,

2016,

2015

and,

2014,

the Company earned

$7.3

million,

$947

thousand and

$4

thousand,respectively, in net sales revenue for its Avenova product from its distribution agreements.

The Company had a deferred revenue balance of

$1,924

thousand and

$24

thousand as of

December

31,

2016

and

December

31,

2015,

respectively, for its Avenova product from its distribution agreements.

XML

Note 14 - Employee Benefit Plan

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

NOTE

14.

EMPLOYEE BENEFIT PLAN

We have a

401(k)

plan covering all eligible employees. We are not required to contribute to the plan and have made

no

contributions through

December

31,

2016.

 

XML

Note 15 - Income Taxes

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

15.

INCOME TAXES

The federal and state income tax provision is summarized as follows (in thousands):

	Year Ending December 31
(in thousands)	2016		2015		2014
Current
Federal	$	—	$	—	$	—
State		2		2		2
Other		—		—		—
Total current tax expense		2		2		2
Deferred
Federal		—		—		—
State		—		—		—
Other		—		—		—
Total deferred tax expense		—		—		—
Income tax provision	$	2	$	2	$	2

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The tax effects of significant items comprising the Company's deferred taxes as of

December

31,

are as follows:

	December 31
(in thousands)	2016			2015
Deferred tax assets:
Net operating losses	$	34,902		$	31,464
Accruals		287			403
Deferred revenue		829			954
Stock options		1,894			1,558
Other deferred tax assets		765			652
Total deferred tax assets		38,677			35,031
Deferred tax liabilities:
Property and equipment		(32	)		(28	)
Total deferred tax liabilities		(32	)		(28	)
Valuation allowance		(38,645	)		(35,003	)
Net deferred taxes	$	—		$	—

The Company records the tax benefit of net operating loss carryforwards and temporary differences as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets is currently not likely to be realized and, accordingly, has provided a valuation allowance.

The valuation allowance increased by the following amounts (in thousands):

2016		2015		2014
$	3,642	$	8,101	$	6,286

In accordance with ASC

718

Compensation – Stock Compensation

, the Company has excluded from deferred tax assets benefits attributable to employee stock option exercises. Therefore, these amounts are not included in gross or net deferred tax assets. The benefit of these NOL carryforwards, totaling

$1.1

million and

$0.7

million at

December

31,

2016

for federal and California tax, respectively, will only be recorded to equity when they reduce cash taxes payable.

NOL and tax credit carryforwards as of

December

31,

2016,

are as follows (in thousands):

			Expiration
	Amount		Years
Net operating losses, federal	$	90,165	2024	-	2036
Net operating losses, state	$	78,219	2028	-	2036
Tax credits, federal	$	1,316	2031	-	2036
Tax credits, state	$	282	do not expire

Under U.S. federal tax law, the amount and availability of tax benefits are subject to a variety of interpretations and restrictive tests. Utilization of the NOL carryforwards

may

be subject to a substantial annual limitation due to ownership changes that have occurred previously or that could occur in the future, as provided by Section

382

of the Internal Revenue Code of

1986,

and similar state provisions. Ownership changes

may

limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section

382,

results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than

50

percentage points over a

three

-year period. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on

two

occasions which, combined with the purchasing shareholders’ subsequent disposition of those shares,

may

have resulted in

one

or more changes of control, as defined by Section

382.

The Company has not currently completed a study to assess whether any change of control has occurred, or whether there have been multiple changes of control since the Company’s formation, due to the significant complexity and cost associated with the study. If the Company has experienced a change of control at any time since its formation, its NOL carryforwards and tax credits

may

not be available, or their utilization could be subject to an annual limitation under Section

382.

A full valuation allowance has been provided against the Company’s NOL carryforwards, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Accordingly, there would be no impact on the consolidated balance sheet or statement of operations and comprehensive loss if an adjustment is required.

The effective tax rate of the Company's provision (benefit) for income taxes differs from the federal statutory rate as follows:

	Year Ending December 31
(in thousands)	2016			2015			2014
Income tax provision (benefit) at federal statutory rate	$	(4,471	)	$	(6,439	)	$	(5,154	)
State tax		(157	)		(1,060	)		(818	)
ISO-related expense for GAAP		52			164			144
Change in valuation allowance		3,641			8,101			6,286
Revaluation of warrant liability		806			(731	)		(565	)
Tax credits		(31	)		(123	)		(44	)
Other		162			90			153
Total	$	2		$	2		$	2

Uncertain Income Tax Positions

The Company adopted the provisions of ASC

740

-

10,

Accounting for Uncertainty in Income Taxes

, on

January

1,

2007.

There was no impact on our consolidated financial position, results of operations and cash flows as a result of adoption. A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended

December

31,

2016

and

2015

is as follows:

	Year ended December 31,
(in thousands)	2016		2015
Unrecognized benefit - beginning of period	$	957	$	811
Gross increases - current period tax positions		17		76
Unrecognized benefit - end of period	$	974	$	957

The Company’s policy will be to recognize interest and penalties related to income taxes as a component of income tax expense. It is subject to income tax examinations for U.S. incomes taxes and state income taxes from

2004

and

2006

forward respectively. It does not anticipate that total unrecognized tax benefits will significantly change in the next

12

months.

XML

Note 16 - Related Party Transactions

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

NOTE

16.

RELATED PARTY TRANSACTIONS     

Related Party Loans

See Note

8,

“Related Party Notes Payable” for a description of the Loan with the following related parties: Mr. Sieczkarek, Chairman of the Board, President and Chief Executive Officer of the Company; the Gail J. Maderis Revocable Trust, on behalf of Ms. Maderis, a Director of the Company; Dr. McPherson, a Director of the Company; and Pioneer China, Pioneer Singapore as a wholly-owned subsidiary of Pioneer China and recipient of all of the holdings of Pioneer Singapore as a result of a recent internal corporate reorganization, and Mr. Fu, the Company’s

two

largest stockholders. The Loan was fully paid off as of

August

1,

2016.

Related Party Financing

See Note

11,

“Stockholders’ Equity (Deficit)” – “Common Stock” for a description of the

February

2016

Purchase Agreements and

April

2016

Securities Purchase Agreement. The following related parties participated in both transactions: Mr. Sieczkarek, Chairman of the Board, President and Chief Executive Officer of the Company; and Pioneer Singapore and Mr. Fu, the Company’s

two

largest stockholders.

Related Party Revenue 

The Company recognized related party revenues from product sales and license and collaboration fees of

$418

thousand,

$95

thousand, and

$208

thousand for the years ended

December

31

2016,

2015

and

2014,

respectively. The Company had related party accounts receivable of

$75

thousand and

$0

as of

December

31,

2016

and

December

31,

2015,

respectively. See Note

13,

“License, Collaboration and Distribution Agreements - NeutroPhase Distribution Agreements,”for additional information regarding the Company’s distribution agreements with Pioneer,

one

of the Company’s largest stockholder.

Related Party Expenses 

The Company recognized related party commission fees of

$1.1

million,

$408

thousand, and

$0

for the years ended

December

31

2016,

2015,

and

2014,

respectively. These fees were paid to China Kington, representing the commission on sale of the Company’s common stock and the exercise of the Company’s warrants. See Note

11,

“Stockholders’ Equity (Deficit)” – “Common Stock” for additional information regarding such commissions.

XML

Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2016

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are expressed in U.S. dollars.

Reclassification, Policy [Policy Text Block]

Reclassifications

Prior period amounts in the accompanying consolidated balance sheets have been reclassified to conform to current period presentation. The reclassifications did not change total assets, total liabilities, or total stockholders’ equity. Additionally, prior period amounts in the accompanying consolidated statement of operations and comprehensive loss and have been reclassified to conform to current period presentation. The reclassifications did not change the net loss or loss per share

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, DermaBay, which was dissolved by the Company in

April

2016.

All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates include useful lives for property and equipment and related depreciation calculations, estimated amortization period for payments received from product development and license agreements as they relate to revenue recognition, assumptions for valuing options and warrants, and income taxes. Actual results could differ from those estimates.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents and Short-Term Investments

The Company considers all highly-liquid instruments with a stated maturity of

three

months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of

December

31,

2016,

and

December

31,

2015,

the Company’s cash and cash equivalents were held in

three

highly-rated, major financial institutions in the United States.

The Company classifies all highly-liquid investments with a stated maturity of greater than

three

months at the date of purchase as short-term investments. Short-term investments generally consist of municipal and corporate debt securities. The Company has classified its short-term investments as available-for-sale. The Company does not intend to hold securities with stated maturities greater than

twelve

months until maturity. These securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive loss until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. A decline in the market value below cost of any available-for-sale security that is determined to be other-than-temporary results in a revaluation of its carrying amount to fair value and an impairment charge to earnings, resulting in a new cost basis for the security.

No

such impairment charges were recorded for the periods presented. The interest income and realized gains and losses are included in other expense, net, within the consolidated statements of operations and comprehensive loss. Interest income is recognized when earned. As of

December

31,

2016

and

December

31,

2015,

the Company had

no

short-term investments.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Concentrations of Credit Risk, Major Partners and Customers, and Suppliers

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits of cash and cash equivalents with

three

highly-rated, major financial institutions in the United States.

Deposits in these banks

may

exceed the amount of federal insurance provided on such deposits. The Company does not believe it is exposed to significant credit risk due to the financial position of the financial institutions in which these deposits are held.

During the years ended

December

31,

2016

and

2015

revenues were derived primarily from sales of Avenova directly to doctors through the Company’s webstore and to

three

major distribution partners. During the year ended

December

31,

2014

revenues were derived primarily from

one

collaboration partner, service revenues and sales of NeutroPhase.

As of

December

31,

2016,

December

31,

2015

and

December

31,

2014

revenues from our major distribution or collaboration partners greater than

10%

are as follows:

	Year Ended December 31,
Major distribution or collaboration partner	2016			2015		2014
Distributer A		20	%		*		*
Distributer B		22	%		*		*
Distributer C		16	%		*		*
Collaborator D		*			*		15	%

*Not greater than

10%

As of

December

31,

2016,

and

December

31,

2015

accounts receivable from our major distribution or collaboration partners greater than

10%

are as follows:

	Year Ended December 31,
Major distribution or collaboration partner	2016			2015
Distributer A		31	%		11	%
Distributer B		24	%		*
Distributer C		22	%		36	%

*Not greater than

10%

The Company relies on

two

third

party sole source manufacturers to produce its finished goods. The Company does not have any manufacturing facilities and intends to continue to rely on

third

parties for the supply of finished goods. Third party manufacturers

may

not be able to meet the Company’s needs with respect to timing, quantity or quality.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value of Financial Assets and Liabilities

Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. Our warrant liability is carried at fair value.

The Company measures the fair value of financial assets and liabilities based on U.S. GAAP guidance, which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements.

Under U.S. GAAP, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is also established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are

three

levels of inputs that

may

be used to measure fair value:

Level

1

– quoted prices in active markets for identical assets or liabilities;

Level

2

– quoted prices for similar assets and liabilities in active markets or inputs that are observable;

Level

3

– inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

Receivables, Trade and Other Accounts Receivable, Allowance for Doubtful Accounts, Policy [Policy Text Block]

Allowance for Doubtful Accounts

The Company charges bad debt expense and records an allowance for doubtful accounts when management believes it unlikely a specific invoice will be collected. Management identifies amounts due that are in dispute and it believes are unlikely to be collected at the end of

2016.

At

December

31,

2016

and

December

31,

2015,

management had reserved

$10

thousand and

$40

thousand, respectively, primarily based on specific amounts that are in dispute and or are over

120

days past due.

Inventory, Policy [Policy Text Block]

Inventory

Inventory is comprised of 

(1)

raw materials and supplies, such as bottles, packaging materials, labels, boxes, pumps;

(2)

goods in progress, which are normally unlabeled bottles; and

(3)

finished goods. We utilize contract manufacturers to produce our products and the cost associated with manufacturing is included in inventory. At

December

31,

2016

and

2015,

management had recorded an allowance for excess and obsolete inventory of

$196

thousand and

$45

thousand, respectively.

Inventory is stated at the lower of cost or market value determined by the

first

-in,

first

-out method.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of

five

to

seven

years for office and laboratory equipment,

three

years for computer equipment and software and

seven

years for furniture and fixtures. Leasehold improvements are amortized over the shorter of

seven

years or the lease term.

The costs of normal maintenance, repairs, and minor replacements are charged to operations when incurred.

In

September

2016,

the Company sub-leased its former headquarters and determined that its leasehold improvements were impaired. This resulted in a

$66

thousand impairment charge recorded to general and administrative expense for the

third

quarter of

2016,

and is reflected in the results for the year ended

December

31,

2016.

 

Impairment or Disposal of Long-Lived Assets, Including Intangible Assets, Policy [Policy Text Block]

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with U.S. GAAP, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally,

may

indicate that an impairment of long-lived assets held for use are present. Management periodically evaluates the carrying value of long-lived assets. During the

first

quarter of fiscal year

2016,

the Company impaired a note receivable which was deemed to no longer be collectable, as the originator of the loan is not in business and the collateral held against the loan did not possess value in an amount sufficient to satisfy the loan. As a result, a

$91

thousand impairment charge was recorded to research and development expense for the

first

quarter of fiscal year

2016,

and is reflected in the results for the year ended

December

31,

2016.

Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the statements of operations.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive Income (Loss)

ASC

220,

Comprehensive Income,

requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported. The Company reports unrealized gains and losses on its available-for-sale securities as other comprehensive income (loss).

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

The Company sells products through a limited number of distributors and via its webstore. The Company generally records product sales upon shipment to the final customer for its webstore sales and upon shipment from its distributor to the final customers for its major distribution partners.

The Company recognizes product revenue when: (i) persuasive evidence that a sale arrangement exists; (ii) delivery has occurred and title has passed; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue from sales transactions where the customer has the right to return the product is recognized at the time of sale only if: (i) the Company’s price to the customer is substantially fixed or determinable at the date of sale; (ii) the customer has paid the Company, or the customer is obligated to pay the Company and the obligation is not contingent on resale of the product; (iii) the customer's obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product; (iv) the customer acquiring the product for resale has economic substance apart from that provided by the Company; (v) the Company does not have significant obligations for future performance to directly bring about resale of the product by the customer; and (vi) the amount of future returns can be reasonably estimated. If these factors were to vary, the resulting change could have a material effect on our revenue recognition and on the Company’s results of operations

Product Revenue Allowances

Product revenue is recognized, net of cash consideration paid to the Company’s customers and wholesalers, for services rendered by wholesalers in accordance with such wholesalers’ agreements and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers' purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.

Other product revenue allowances include certain prompt pay discounts and allowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue or as a selling expense at the later of the date at which the related revenue is recognized or the date at which the allowance is offered.

Other Revenue

License and collaboration revenue is primarily generated through agreements with strategic partners for the development and commercialization of the Company’s product candidates. The terms of the agreements typically include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of certain milestones and royalties on net product sales. In accordance with authoritative guidance, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables are accounted for as a single unit of accounting and revenue is recognized over the performance obligation period. Revenue is recognized when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. If these factors were to vary the resulting change could have a material effect on our revenue recognition and on our results of operations.

Cost of Sales, Policy [Policy Text Block]

Cost of Goods Sold

Cost of goods sold includes

third

party manufacturing costs, shipping costs, and other costs of goods sold. Cost of goods sold also includes any necessary allowances for excess inventory that

may

expire and become unsalable.

Research and Development Expense, Policy [Policy Text Block]

Research and Development Costs

The Company charges research and development costs to expense as incurred. These costs include salaries and benefits for research and development personnel, costs associated with clinical trials managed by contract research organizations, and other costs associated with research, development and regulatory activities. Research and development costs

may

vary depending on the type of item or service incurred, location of performance or production, or lack of availability of the item or service, and specificity required in production for certain compounds. The Company uses external service providers to conduct clinical trials, to manufacture supplies of product candidates and to provide various other research and development-related products and services. The Company’s research, clinical and development activities are often performed under agreements it enters into with external service providers.  The Company estimates and accrues the costs incurred under these agreements based on factors such as milestones achieved, patient enrollment, estimates of work performed, and historical data for similar arrangements.  As actual costs are incurred, the Company adjusts its accruals.  Historically, the Company’s accruals have been consistent with management’s estimates, and no material adjustments to research and development expenses have been recognized.  Subsequent changes in estimates

may

result in a material change in the Company’s expenses, which could also materially affect its results of operations.

Legal Costs, Policy [Policy Text Block]

Patent Costs

Patent costs, including legal expenses, are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of Accounting Standards Updates (“ASU”) No.

2014

-

12,

Compensation-Stock Compensation (Topic

718)

. Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date for all stock-based awards to employees and directors and is recognized as expense over the requisite service period, which is generally the vesting period. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model. See Note

12

for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. The Company accounts for restricted stock unit awards issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.

Income Tax, Policy [Policy Text Block]

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.

Warrant Liabilities [Policy Text Block]

Common Stock Warrant Liabilities

For warrants that are newly issued or modified and there is a deemed possibility that the Company

may

have to settle them in cash, or for warrants it issues or modifies that contain an exercise price adjustment feature, the Company records the fair value of the issued or modified warrants as a liability at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model. The Lattice model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of our judgment. 

Earnings Per Share, Policy [Policy Text Block]

Net Income (Loss) per Share

The Company computes net income (loss) per share by presenting both basic and diluted earnings (loss) per share (“EPS”).

Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing, diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods because their effect would be anti-dilutive. During years ended

December

31,

2016,

2015

and

2014,

there is no difference between basic and diluted net loss per share. The following table sets forth the reconciliation between basic EPS and diluted EPS, after giving effect to the reverse stock split.

	Year Ended December 31,
(in thousands, except per share data)	2016			2015			2014
Net loss	$	(13,151	)	$	(18,973	)	$	(15,194	)
Basic shares		9,408			2,784			1,985
Add: shares issued upon assumed exercise of stock options and warrants		—			—			—
Diluted shares		9,408			2,784			1,985
Basic EPS	$	(1.40	)	$	(6.82	)	$	(7.65	)
Diluted EPS	$	(1.40	)	$	(6.82	)	$	(7.65	)

The following outstanding stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive:

	Year Ended December 31,
(in thousands)	2016		2015		2014
Stock options		1,489		388		323
Stock warrants		565		1,458		197

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

In

May

2014,

the Financial Accounting Standards Board (“FASB”) issued ASU No.

2014

-

09,

Revenue from Contracts with Customers

(Topic

606).

In

August

2015

and

March,

April,

May

and

December

2016,

the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These

may

include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each performance obligation. ASU

2014

-

09

as amended is effective for interim and annual reporting periods beginning after

December

15,

2017

but permitted the Company to adopt the standard early, but not before the original effective date of

December

15,

2016.

The Company plans to adopt the new standard effective

January

1,

2018

with a modified retrospective transition applying the new guidance to the most current period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most current period presented.

While the Company is still in the process of assessing the potential impact of this new standard on its consolidated financial statements, the Company has identified that transactions which under current guidance are recognized upon shipment from its distributor to the final customers for its major distribution partners will be recognized upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to. As a result, the Company will record contract liabilities for the invoiced amounts that are estimated to be subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, chargebacks, and product returns. The constraint on variable consideration for product returns will be a new estimation resulting from the earlier recognition under the new guidance.

The Company has also identified that license and collaboration revenue that is currently accounted for as a combined unit of accounting because products or services are not separable,

may

be identified as separate performance obligations that are capable of being distinct under the new guidance. As a result, the transaction price under these arrangements, including upfront fees and milestone payments,

may

be allocated differently to performance obligations, which

may

each be recognized at earlier points in time or with a different pattern of performance over time.

The Company is still evaluating its major distribution agreements and its license and collaboration agreements and assessing the impact of adoption of the new standard to its consolidated financial statements. The company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that

may

impact its current conclusions, and will expand its analysis to include any new or modified revenue arrangements prior to adoption. The Company expects to complete the efforts by the

fourth

quarter of

2017.

 

In

August

2014,

FASB issued ASU

2014

-

15,

 

Presentation of Financial Statements

 – 

Going Concern (Subtopic

205

-

40):

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

. This new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosure if substantial doubt exists. The new standard is effective for annual periods ending after

December

15,

2016

and for annual periods and interim periods thereafter. Early adoption is permitted. The Company adopted ASU

2014

-

15

and for adoption impact see

Note1

to the financial statements under “

liquidity

”

In

July

2015,

the FASB issued ASU No.

2015

-

11,

Inventory (Topic

330):

Simplifying the Measurement of Inventory

, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU No.

2015

-

11

defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for the Company in the

first

quarter of fiscal year

2017,

with early adoption permitted. The Company is still evaluating, but does not believe the implementation of this guidance will result in a material impact to its consolidated financial statements.

In

January

2016,

the FASB issued ASU

2016

-

01,

Financial Instruments – Overall (Subtopic

825

-

10)

:

Recognition and Measurement of Financial Assets and Financial Liabilities

, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This guidance will be effective for the Company beginning in the

first

quarter of fiscal year

2018.

The Company is evaluating the effects of the adoption of this guidance to its consolidated financial statements.

In

February

2016,

the FASB issued ASU

2016

-

02,

Leases (Topic

842)

, which supersedes the lease accounting requirements in

Leases (Topic

840)

. ASU

2016

-

02

requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the

first

quarter of fiscal year

2019.

The Company is evaluating the effects of the adoption of this guidance on its consolidated financial statements.

In

March

2016,

the FASB issued ASU

2016

-

09,

Compensation – Stock Compensation (Topic

718):

Improvements to Employee Share-Based Payment Accounting,

which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective beginning in the

first

quarter of fiscal year

2017

and early adoption is permitted in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes such interim period. The Company is still evaluating, but does not believe the implementation of this guidance will result in a material impact to its consolidated financial statements.

In

August

2016,

the FASB issued ASU

2016

-

15,

Classification of Certain Cash Receipts and Cash Payments (Topic

230),

which addresses

eight

specific issues regarding the treatment of cash flow. This update is effective for the Company for its fiscal year

2018.

The Company is currently evaluating the effects of the adoption of ASU

2016

-

15

to its consolidated financial statements.

In

November

2016,

the FASB issued ASU

2016

-

18,

Statement of Cash Flows (Topic

230),

that will require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This update is effective for the Company for its fiscal year

2018.

The Company is currently evaluating the effects of the adoption of ASU

2016

-

18

to its consolidated financial statements.

XML

Note 2 - Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	Year Ended December 31,
Major distribution or collaboration partner	2016			2015		2014
Distributer A		20	%		*		*
Distributer B		22	%		*		*
Distributer C		16	%		*		*
Collaborator D		*			*		15	%

	Year Ended December 31,
Major distribution or collaboration partner	2016			2015
Distributer A		22	%		36	%
Distributer B		24	%		11	%
Distributer C		31	%		*

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Year Ended December 31,
(in thousands, except per share data)	2016			2015			2014
Net loss	$	(13,151	)	$	(18,973	)	$	(15,194	)
Basic shares		9,408			2,784			1,985
Add: shares issued upon assumed exercise of stock options and warrants		—			—			—
Diluted shares		9,408			2,784			1,985
Basic EPS	$	(1.40	)	$	(6.82	)	$	(7.65	)
Diluted EPS	$	(1.40	)	$	(6.82	)	$	(7.65	)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	Year Ended December 31,
(in thousands)	2016		2015		2014
Stock options		1,489		388		323
Stock warrants		565		1,458		197

XML

Note 3 - Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

	Fair Value Measurements Using
(in thousands)	Balance at December 31, 2016		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	100	$	100	$	—	$	—
Restricted cash held as a certificate of deposit		324		324		—		—
Deposit held as a certificate of deposit		150		150		—		—
Total assets	$	574	$	574	$	—	$	—
Liabilities
Warrant liability	$	1,446	$	—	$	—	$	1,446
Total liabilities	$	1,446	$	—	$	—	$	1,446

	Fair Value Measurements Using
(in thousands)	Balance at December 31, 2015		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash equivalents	$	2,385	$	2,385	$	—	$	—
Total assets	$	2,385	$	2,385	$	—	$	—
Liabilities
Warrant liability	$	1,450	$	—	$	—	$	1,450
Total liabilities	$	1,450	$	—	$	—	$	1,450

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

(in thousands)	2016			2015
Fair value of warrant liability at January 1	$	1,450		$	173
Fair value of warrants issued		—			1,251
Fair value of warrants transferred (to) from equity upon exercise		(2,103	)		2,175
Increase (decrease) in fair value on exercise date and December 31		2,099			(2,149	)
Fair value of warrant liability at December 31	$	1,446		$	1,450

XML

Note 4 - Prepaid Expenses and Other Current Assets (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Table Text Block]

(in thousands)	December 31, 2016		December 31, 2015
Prepaid sales rebates	$	658	$	—
Prepaid outsourced sales team		606		—
Rent receivable		165		—
Prepaid research and development services		123		—
Prepaid rent		120		—
Other		294		261
Total prepaid expenses and other current assets	$	1,966	$	261

XML

Note 5 - Inventory (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Inventory, Current [Table Text Block]

(in thousands)	December 31, 2016			December 31, 2015
Raw materials and supplies	$	514		$	660
Goods in process		—			248
Finished goods		555			482
Less: Reserve for excess and obsolete inventory		(196	)		(45	)
Total inventory, net	$	873		$	1,345

XML

Note 6 - Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Property, Plant and Equipment [Table Text Block]

(in thousands)	December 31, 2016			December 31, 2015
Office and laboratory equipment	$	24		$	1,528
Furniture and fixtures		153			169
Computer equipment and software		170			122
Production equipment		105			105
Leasehold improvements		68			173
Total property and equipment, at cost		520			2,097
Less: accumulated depreciation and amortization		(149	)		(1,702	)
Total property and equipment, net	$	371		$	395

XML

Note 7 - Accrued Liabilities (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

(in thousands)	December 31, 2016		December 31, 2015
Research and development	$	2	$	394
Employee payroll and benefits		763		414
Severance pay		250		790
Sales rebates		166		150
Outsourced sales team		333		—
Inventory		75		—
Other		212		232
Total accrued liabilities	$	1,801	$	1,980

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Note 9 - Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

(in thousands)	Lease Commitment
Year ending December 31:
2017	$	987
2018		1,083
2019		1,116
2020		1,026
2021		438
Thereafter		75
Total lease commitment	$	4,725

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Note 10 - Warrant Liability (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Derivative Instruments [Table Text Block]

Assumption
Expected price volatility		80.00	%
Expected term (in years)		4.36
Risk-free interest rate		1.23	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.60

	Year Ended December 31,
Assumption	2016			2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.55		$	1.10

Assumption
Expected price volatility		80.00	%
Expected term (in years)		4.36
Risk-free interest rate		1.23	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.78

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.47		$	1.16

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		102.00	%		80.00	%
Expected term (in years)		3.18			4.18
Risk-free interest rate		1.51	%		1.58	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.55		$	1.16

Assumption
Expected price volatility		75.50	%
Expected term (in years)		5.00
Risk-free interest rate		1.38	%
Dividend yield		0.00	%
Weighted-average fair value of warrants	$	2.82

	Period Ended
Assumption	December 31, 2016			December 31, 2015
Expected price volatility		96.00	%		77.50	%
Expected term (in years)		3.83			4.83
Risk-free interest rate		1.66	%		1.72	%
Dividend yield		0.00	%		0.00	%
Weighted-average fair value of warrants	$	2.60		$	1.21

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

(in thousands)	Warrants			Weighted- Average Exercise Price
Outstanding at December 31, 2013		192		$	43.00
Warrants granted		55		$	39.00
Warrants expired		(50	)	$	68.75
Outstanding at December 31, 2014		197		$	35.23
Warrants granted		1,317		$	7.40
Warrants expired		(56	)	$	39.00
Outstanding at December 31, 2015		1,458		$	5.19
Warrants granted		3,087		$	1.91
Warrants exercised		(3,977	)	$	1.95
Warrants expired		(3	)	$	78.13
Outstanding at December 31, 2016		565		$	1.81

July 2011, Long-term, Short-term, and October 2015 Warrants [Member]

Notes Tables

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

Shares and dollars in thousands	Shares		Warrant Liability
July 2011 Warrants		49	$	126
Long-Term Warrants		105		267
Short-Term Warrants		127		312
October 2015 Warrants		284		741
		565	$	1,446

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Note 11 - Stockholders' Equity (Deficit) (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block]

(in thousands)	Warrants			Weighted- Average Exercise Price
Outstanding at December 31, 2013		192		$	43.00
Warrants granted		55		$	39.00
Warrants expired		(50	)	$	68.75
Outstanding at December 31, 2014		197		$	35.23
Warrants granted		1,317		$	7.40
Warrants expired		(56	)	$	39.00
Outstanding at December 31, 2015		1,458		$	5.19
Warrants granted		3,087		$	1.91
Warrants exercised		(3,977	)	$	1.95
Warrants expired		(3	)	$	78.13
Outstanding at December 31, 2016		565		$	1.81

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Note 12 - Equity-based Compensation (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

(in thousands, except years and per share data)	Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2013		287		$	42.00		6.6		422
Options granted		68		$	22.50
Restricted stock units granted		3		$	—
Options exercised		(2	)	$	14.00
Restricted stock units vested		(4	)	$	—
Options forfeited/cancelled		(29	)	$	36.50
Outstanding at December 31, 2014		323		$	38.25		6.3		23
Options granted		85		$	11.20
Restricted stock units granted		16		$	—
Options exercised		-		$	—
Restricted stock units vested		(6	)	$	—
Options forfeited/cancelled		(28	)	$	30.58
Restricted stock units cancelled		(2	)	$	—
Outstanding at December 31, 2015		388		$	32.03		6.2		19
Options granted		1,227		$	2.74
Restricted stock units granted		104		$	—
Options exercised		-		$	—
Restricted stock units vested		(114	)	$	—
Options forfeited/cancelled		(116	)	$	28.27
Restricted stock units cancelled		-		$	—
Outstanding at December 31, 2016		1,489		$	8.38		8.7	$	702
Vested and expected to vest at December 31, 2016		1,466		$	8.45		8.6	$	691
Vested at December 31, 2016		402		$	22.45		6.6	$	—
Exercisable at December 31, 2016		402		$	22.45		6.6	$	—

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Year Ended December 31,
Assumption	2016			2015			2014
Expected price volatility		84.47	%		77.22	%		76.88	%
Expected term (in years)		7.03			6.8			6.5
Risk-free interest rate		1.57	%		1.76	%		2.06	%
Dividend yield		0.00	%		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	2.06		$	7.35		$	15.25

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Year Ended December 31,
(in thousands)	2016		2015		2014
Research and development	$	195	$	449	$	376
Sales and Marketing		132		-		-
General and administrative		1,424		933		666
Total stock-based compensation expense	$	1,751	$	1,382	$	1,042

Nonemployees [Member]

Notes Tables

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Year Ended December 31,
Assumption	2016			2015			2014
Expected price volatility		87.68	%		83.77	%		79.10	%
Expected term (in years)		10.0			9.6			8.6
Risk-free interest rate		1.61	%		2.18	%		2.28	%
Dividend yield		0.00	%		0.00	%		0.00	%
Weighted-average fair value of options granted during the period	$	2.29		$	7.15		$	15.25

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Note 13 - License, Collaboration and Distribution Agreements (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Deferred Revenue, by Arrangement, Disclosure [Table Text Block]

	Year Ended December 31,
(in thousands)	2016		2015		2014
Materials, Equipment, and Contract Study Costs	$	—	$	—	$	39

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	94	$	25	$	47
Product sales		324		70		161
	$	418	$	95	$	208

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	21	$	5	$	7
Product sales		332		34		101
	$	353	$	39	$	108

	Year Ended December 31,
(in thousands)	2016		2015		2014
Amortization of upfront technology access fee	$	—	$	1	$	4
Product sales		22		66		104
	$	22	$	67	$	108

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Note 15 - Income Taxes (Tables)

12 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

	Year Ending December 31
(in thousands)	2016		2015		2014
Current
Federal	$	—	$	—	$	—
State		2		2		2
Other		—		—		—
Total current tax expense		2		2		2
Deferred
Federal		—		—		—
State		—		—		—
Other		—		—		—
Total deferred tax expense		—		—		—
Income tax provision	$	2	$	2	$	2

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

	December 31
(in thousands)	2016			2015
Deferred tax assets:
Net operating losses	$	34,902		$	31,464
Accruals		287			403
Deferred revenue		829			954
Stock options		1,894			1,558
Other deferred tax assets		765			652
Total deferred tax assets		38,677			35,031
Deferred tax liabilities:
Property and equipment		(32	)		(28	)
Total deferred tax liabilities		(32	)		(28	)
Valuation allowance		(38,645	)		(35,003	)
Net deferred taxes	$	—		$	—

Summary of Valuation Allowance [Table Text Block]

2016		2015		2014
$	3,642	$	8,101	$	6,286

Summary of Tax Credit Carryforwards [Table Text Block]

			Expiration
	Amount		Years
Net operating losses, federal	$	90,165	2024	-	2036
Net operating losses, state	$	78,219	2028	-	2036
Tax credits, federal	$	1,316	2031	-	2036
Tax credits, state	$	282	do not expire

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

	Year Ending December 31
(in thousands)	2016			2015			2014
Income tax provision (benefit) at federal statutory rate	$	(4,471	)	$	(6,439	)	$	(5,154	)
State tax		(157	)		(1,060	)		(818	)
ISO-related expense for GAAP		52			164			144
Change in valuation allowance		3,641			8,101			6,286
Revaluation of warrant liability		806			(731	)		(565	)
Tax credits		(31	)		(123	)		(44	)
Other		162			90			153
Total	$	2		$	2		$	2

Schedule of Unrecognized Tax Benefits Roll Forward [Table Text Block]

	Year ended December 31,
(in thousands)	2016		2015
Unrecognized benefit - beginning of period	$	957	$	811
Gross increases - current period tax positions		17		76
Unrecognized benefit - end of period	$	974	$	957

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Note 1 - Organization (Details Textual)		1 Months Ended	12 Months Ended
	Dec. 11, 2015	Aug. 31, 2007	Dec. 31, 2016	Dec. 31, 2015
Number of Subsidiaries		2
Number of Operating Segments			1	4
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio	25		25

XML

Note 2 - Summary of Significant Accounting Policies (Details Textual) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Sep. 30, 2016	Mar. 31, 2016	Dec. 31, 2016	Dec. 31, 2015
Inventory Valuation Reserves			$ 196	$ 45
Impairment of Long-Lived Assets Held-for-use				0
Short-term Investments			$ 0	0
General and Administrative Expense [Member]
Impairment of Leasehold	$ 66
Research and Development Expense [Member]
Impairment of Long-Lived Assets Held-for-use		$ 91
Computer Equipment and Software [Member]
Property, Plant and Equipment, Useful Life			3 years
Furniture and Fixtures [Member]
Property, Plant and Equipment, Useful Life			7 years
Minimum [Member] | Equipment [Member]
Property, Plant and Equipment, Useful Life			5 years
Maximum [Member] | Equipment [Member]
Property, Plant and Equipment, Useful Life			7 years
Maximum [Member] | Leasehold Improvements [Member]
Property, Plant and Equipment, Useful Life			7 years
Allowance for Doubtful Accounts [Member]
Valuation Allowances and Reserves, Balance			$ 10	$ 40

XML

Note 2 - Summary of Significant Accounting Policies - Revenues and Accounts Receivable From Major Distribution Partners and Customers (Details) - Customer Concentration Risk [Member]		12 Months Ended
		Dec. 31, 2016	Dec. 31, 2015
Sales Revenue, Net [Member] | Distributor A [Member]
Distributer A		20.00%
Sales Revenue, Net [Member] | Distributor B [Member]
Distributer A		22.00%
Sales Revenue, Net [Member] | Distributor C [Member]
Distributer A		16.00%
Sales Revenue, Net [Member] | Collaborator D [Member]
Distributer A	[1]		15.00%
Accounts Receivable [Member] | Distributor A [Member]
Distributer A		22.00%	36.00%
Accounts Receivable [Member] | Distributor B [Member]
Distributer A		24.00%	11.00%	[1]
Accounts Receivable [Member] | Distributor C [Member]
Distributer A		31.00%

[1] Not greater than 10%.

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Note 2 - Summary of Significant Accounting Policies - Reconciliation Between Basic Net Income (Loss) Per Share and Diluted Net Income (Loss) Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Net loss	$ (13,151)	$ (18,973)	$ (15,194)
Basic shares (in shares)	9,408	2,784	1,985
Diluted shares (in shares)	9,408	2,784	1,985
Basic EPS (in dollars per share)	$ (1.40)	$ (6.82)	$ (7.65)
Diluted EPS (in dollars per share)	$ (1.40)	$ (6.82)	$ (7.65)

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Note 2 - Summary of Significant Accounting Policies - Outstanding Stock Options and Stock Warrants Excluded from the Diluted Net Loss Per Share Computation (Details) - shares shares in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Employee Stock Option [Member]
Stock options (in shares)	1,489	388	323
Warrant [Member]
Stock options (in shares)	565	1,458	197

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Note 3 - Fair Value Measurements (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Other Nonoperating Gains (Losses)	$ (2,099)	$ 2,149	$ 1,664

XML

Note 3 - Fair Value Measurements - Assets and Liabilities Measured at Fair Value on a Recurring Basis (Details) - Fair Value, Measurements, Recurring [Member] - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Assets
Cash equivalents	$ 100	$ 2,385
Restricted cash held as a certificate of deposit	324
Deposit held as a certificate of deposit	150
Total assets	574	2,385
Liabilities
Warrant liability	1,446	1,450
Total liabilities	1,446	1,450
Fair Value, Inputs, Level 1 [Member]
Assets
Cash equivalents	100	2,385
Restricted cash held as a certificate of deposit	324
Deposit held as a certificate of deposit	150
Total assets	574	2,385
Liabilities
Warrant liability
Total liabilities
Fair Value, Inputs, Level 2 [Member]
Assets
Cash equivalents
Restricted cash held as a certificate of deposit
Deposit held as a certificate of deposit
Total assets
Liabilities
Warrant liability
Total liabilities
Fair Value, Inputs, Level 3 [Member]
Assets
Cash equivalents
Restricted cash held as a certificate of deposit
Deposit held as a certificate of deposit
Total assets
Liabilities
Warrant liability	1,446	1,450
Total liabilities	$ 1,446	$ 1,450

XML

Note 3 - Fair Value Measurements - Fair Value of Warrant Liability (Details) - Warrant Liability [Member] - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Fair value of warrant liability	$ 1,450	$ 173
Fair value of warrants issued		1,251
Fair value of warrants transferred (to) from equity upon exercise	(2,103)	2,175
Increase in fair value	2,099	(2,149)
Fair value of warrant liability	$ 1,446	$ 1,450

XML

Note 4 - Prepaid Expenses and Other Current Assets - Summary of Prepaid Expenses and Other Current Assets (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Prepaid sales rebates	$ 658
Prepaid outsourced sales team	606
Rent receivable	165
Prepaid research and development services	123
Prepaid rent	120
Other	294	261
Total prepaid expenses and other current assets	$ 1,966	$ 261

XML

Note 5 - Inventory - Summary of Inventory (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Raw materials and supplies	$ 514	$ 660
Goods in process		248
Finished goods	555	482
Less: Reserve for excess and obsolete inventory	(196)	(45)
Total inventory, net	$ 873	$ 1,345

XML

Note 6 - Property and Equipment (Details Textual) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Sep. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Gain (Loss) on Disposition of Property Plant Equipment, Excluding Oil and Gas Property and Timber Property		$ 219	$ 1	$ 54
Tangible Asset Impairment Charges		70
Depreciation, Depletion and Amortization		114	$ 164	$ 232
Damaged, Unusable and Full Depreciated Properly and Equipment [Member]
Gain (Loss) on Disposition of Property Plant Equipment, Excluding Oil and Gas Property and Timber Property		(13)
General and Administrative Expense [Member]
Impairment of Leasehold	$ 66
General and Administrative Expense [Member] | Damaged, Unusable and Full Depreciated Properly and Equipment [Member]
Tangible Asset Impairment Charges		4
General and Administrative Expense [Member] | Sublease Agreement [Member]
Impairment of Leasehold		66
Research and Development Expense [Member] | Laboratory Equipment [Member]
Gain (Loss) on Disposition of Property Plant Equipment, Excluding Oil and Gas Property and Timber Property		$ 232

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Note 6 - Property and Equipment - Summary of Property and Equipment (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Property and equipment, at cost	$ 520	$ 2,097
Less: accumulated depreciation and amortization	(149)	(1,702)
Total property and equipment, net	371	395
Equipment [Member]
Property and equipment, at cost	24	1,528
Furniture and Fixtures [Member]
Property and equipment, at cost	153	169
Computer Equipment and Software [Member]
Property and equipment, at cost	170	122
Production Equipment [Member]
Property and equipment, at cost	105	105
Leasehold Improvements [Member]
Property and equipment, at cost	$ 68	$ 173

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Note 7 - Accrued Liabilities - Summary of Accrued Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Research and development	$ 2	$ 394
Employee payroll and benefits	763	414
Severance pay	250	790
Sales rebates	166	150
Outsourced sales team	333
Inventory	75
Other	212	232
Total accrued liabilities	$ 1,801	$ 1,980

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Note 8 - Related Party Notes Payable (Details Textual) - USD ($)	Aug. 01, 2016	May 06, 2016	Jan. 12, 2016	Dec. 30, 2015	Dec. 31, 2016
Proceeds from Issuance of Private Placement	$ 11,800,000	$ 11,800,000
Private Placement [Member]
Repayments of Related Party Debt	$ 520,000	$ 2,500,000
Notes [Member] | China Kingston [Member]
Loan Facilitation Consideration Lead Financings, Three Consecutive Months Cash Flow, Minimum				$ 0
Loan Facilitation Consideration Financing Provided By Board and Management on Next Financing, Percentage				9.00%
Loan Facilitation Consideration, Number of New Appointments to Board				2
Notes [Member] | Lenders [Member]
Proceeds from Related Party Debt				$ 3,000,000
Related Party Transaction, Rate				6.00%
Due to Related Parties					$ 0
Promissory Note 1 [Member] | Board of Directors Chairman [Member]
Proceeds from Related Party Debt				$ 199,000
Promissory Note 2 [Member] | Director [Member]
Proceeds from Related Party Debt				71,000
Promissory Note 3 [Member] | Director [Member]
Proceeds from Related Party Debt				20,000
Promissory Note 4 [Member] | Pioneer Pharma Co. [Member]
Proceeds from Related Party Debt				$ 1,400,000
Promissory Note 5 [Member] | Mr. Fu [Member]
Proceeds from Related Party Debt			$ 1,400,000
Debt Instrument, Term			3 years

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Note 9 - Commitments and Contingencies (Details Textual)		3 Months Ended	12 Months Ended
	Aug. 24, 2016 USD ($) ft²	Sep. 30, 2016 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)	Dec. 31, 2014 USD ($)	Jul. 11, 2016 ft²
Area of Property in Sublease Agreement | ft²						16,465
Operating Leases, Rent Expense			$ 938,000	$ 1,008,000	$ 1,045,000
Deferred Rent Credit, Noncurrent			327,000	$ 189,000
General and Administrative Expense [Member]
Noncash Loss on Sublease			40,000
Impairment of Leasehold		$ 66,000
Sublease Agreement [Member]
Operating Leases, Future Minimum Payments Receivable, Current			709,000
Operating Leases, Future Minimum Payments Receivable, in Two Years			609,000
Operating Leases, Future Minimum Payments Receivable, in Three Years			690,000
Operating Leases, Future Minimum Payments Receivable, in Four Years			576,000
Sublease Agreement [Member] | General and Administrative Expense [Member]
Impairment of Leasehold			$ 66,000
KBSIII Towers [Member]
Lessee Leasing Arrangements, Operating Leases, Square Feet of Property | ft²	7,799
Lessee Leasing Arrangements, Operating Leases, Renewal Term	5 years
Lessee Leasing Arrangements, Operating Leases, Earliest Period Prior to Expiration of Current Term to Renew Lease	1 year
Lessee Leasing Arrangements, Operating Leases, Latest Period Prior to Expiration of Current Term to Renew Lease	270 days
Lessee Leasing Arrangements, Operating Leases, Term of Contract	5 years 90 days
Lessee Leasing Arrangements, Operating Leases, Direct Expenses of Premises, Percentage	2.16%
Lessee Leasing Arrangements, Operating Leases, Abatement Term for Monthly Base Rental Payments	90 days
KBSIII Towers [Member] | Other Assets [Member]
Lessee Leasing Arrangements, Operating Leases, Standby Letter of Credit, Initial Amount	$ 323,658
KBSIII Towers [Member] | First 12 Months of Operating Lease [Member]
Lessee Leasing Arrangements, Operating Leases, Monthly Base Rental Rate	4.15
Lessee Leasing Arrangement, Operating Leases, Annual Base Rental Rate Amount	$ 338,390
KBSIII Towers [Member] | Every 11 Months of Operating Lease [Member]
Lessee Leasing Arrangements, Operating Leases, Increase in Monthly Base Rental Rate, Percentage	3.00%
KBSIII Towers [Member] | First 61 to 63 Months of Operating Lease [Member] | Maximum [Member]
Lessee Leasing Arrangements, Operating Leases, Monthly Base Rental Rate	4.81
Lessee Leasing Arrangement, Operating Leases, Annual Base Rental Rate Amount	$ 450,250
KBSIII Towers [Member] | Last Day of 60th Month of Operating Lease [Member] | Maximum [Member]
Lessee Leasing Arrangements, Operating Leases, Standby Letter of Credit, Reduced Amount	$ 151,823

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Note 9 - Commitments and Contingencies - Future Minimum Lease Payments (Details) $ in Thousands	Dec. 31, 2016 USD ($)
2017	$ 987
2018	1,083
2019	1,116
2020	1,026
2021	438
Thereafter	75
Total lease commitment	$ 4,725

XML

Note 10 - Warrant Liability (Details Textual) - USD ($)										1 Months Ended		3 Months Ended		12 Months Ended
	Aug. 01, 2016	May 05, 2016	Apr. 04, 2016	Feb. 16, 2016	Oct. 27, 2015	Oct. 27, 2015	Oct. 22, 2015	May 22, 2015	Mar. 03, 2015	Oct. 31, 2015	Jul. 31, 2011	Dec. 31, 2016	Sep. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Sep. 29, 2016	Sep. 28, 2016	May 31, 2016	Feb. 29, 2016	Mar. 06, 2015	Mar. 25, 2014	Dec. 31, 2013	Jan. 05, 2012
Noncash or Part Noncash Acquisition, Noncash Financial or Equity Instrument Consideration, Warrants Issued											139,520
Class of Warrant or Right, Exercise Price of Warrants or Rights											$ 33.25	$ 1,810		$ 1,810	$ 5,190	$ 35,230	$ 3.15	$ 19.50				$ 39	$ 43,000
Minimum Common Stock Closing Bid Price Per Share																								$ 66.50
Warrant Expiration Term						5 years				5 years
Stock Issued During Period, Shares, New Issues				1,518,567		492,000		435,746
Class of Warrant or Right, Number of Securities Called by Warrants or Rights												363,523	3,613,284	363,523					2,039,530			56,000
Warrants and Rights Outstanding												$ 1,446,000		$ 1,446,000	$ 1,450,000
Proceeds from Warrant Exercises												900,000	$ 6,600,000
Other Nonoperating Gains (Losses)														(2,099,000)	$ 2,149,000	$ 1,664,000
Fair Market Value of Warrants Transferred to Equity Upon Exercise														2,103,000
Short-term Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights									$ 15
Warrants and Rights Outstanding												312,000		312,000
Long-term Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights									$ 16.25
Warrants and Rights Outstanding												$ 267,000		$ 267,000
The 2011 and March 2015 Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights							$ 5
Warrants to be Exercised at Lower Price Stock Price Trigger							5
Class of Warrant or Right Price Protection Provision Exchangeable Securities Exercise Price Trigger							$ 5
Warrants and Rights Outstanding					$ 1,800,000	$ 1,800,000
July 2011, March 2015, and October 2015 Warrants [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights												363,523	3,613,284	363,523
Class of Warrant or Right, Exercised During Period												363,523	3,613,284
Proceeds from Warrant Exercises												$ 900,000	$ 6,900,000
Other Nonoperating Gains (Losses)												500,000	1,600,000
Fair Market Value of Warrants Transferred to Equity Upon Exercise												500,000	$ 1,600,000
The 2011 Warrants [Member]
Warrants and Rights Outstanding					$ 360,821	$ 360,821						$ 126,000		$ 126,000
Private Placement [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights			$ 1.91
Length of Notice Required to Investors Prior to Issuance of New Securities							2 days		20 days
Warrant Expiration Term			4 years
Stock Issued During Period, Shares, New Issues	2,094,241	4,079,058	6,173,299
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1,047,121	2,039,530	3,086,651																		370,933
Private Placement [Member] | Short-term Warrants [Member]
Warrant Expiration Term							1 year 90 days
Class of Warrant or Right, Number of Securities Called by Warrants or Rights																					370,933
Private Placement [Member] | Long-term Warrants [Member]
Warrant Expiration Term							5 years
Class of Warrant or Right, Number of Securities Called by Warrants or Rights																					278,200
Underwriting Agreement [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights					$ 5	$ 5
Warrant Expiration Term					60 years
Stock Issued During Period, Shares, New Issues					492,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights					442,802	442,802
Warrants and Rights Outstanding					$ 1,300,000	$ 1,300,000
Proceeds from Issuance of Stock and Warrants					$ 2,100,000
Mr. Fu [Member]
Stock Issued During Period, Shares, New Issues				696,590
Mr. Fu [Member] | July 2011, March 2015, and October 2015 Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights																				$ 1.81

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Note 10 - Warrant Liability - The Key Assumptions Used to Value the Warrants (Details) - Warrant Fair Value [Member] - $ / shares		12 Months Ended
	Oct. 27, 2015	Dec. 31, 2016	Dec. 31, 2015
The 2011 Warrants [Member]
Expected price volatility	80.00%	102.00%	80.00%
Expected term (in years) (Year)	4 years 131 days	3 years 65 days	4 years 65 days
Risk-free interest rate	1.23%	1.51%	1.58%
Dividend yield	0.00%	0.00%	0.00%
Weighted-average fair value of warrants (in dollars per share)	$ 2.60	$ 2.55	$ 1.10
Expected price volatility	80.00%	102.00%	80.00%
Expected term (in years) (Year)	4 years 131 days	3 years 65 days	4 years 65 days
Risk-free interest rate	1.23%	1.51%	1.58%
Dividend yield	0.00%	0.00%	0.00%
Weighted-average fair value of warrants (in dollars per share)	$ 2.60	$ 2.55	$ 1.10
Short-term and Long-term Warrants [Member]
Expected price volatility	80.00%
Expected term (in years) (Year)	4 years 131 days
Risk-free interest rate	1.23%
Dividend yield	0.00%
Weighted-average fair value of warrants (in dollars per share)	$ 2.78
Expected price volatility	80.00%
Expected term (in years) (Year)	4 years 131 days
Risk-free interest rate	1.23%
Dividend yield	0.00%
Weighted-average fair value of warrants (in dollars per share)	$ 2.78
Short-term Warrants [Member]
Expected price volatility		102.00%	80.00%
Expected term (in years) (Year)		3 years 65 days	4 years 65 days
Risk-free interest rate		1.51%	1.58%
Dividend yield		0.00%	0.00%
Weighted-average fair value of warrants (in dollars per share)		$ 2.47	$ 1.16
Expected price volatility		102.00%	80.00%
Expected term (in years) (Year)		3 years 65 days	4 years 65 days
Risk-free interest rate		1.51%	1.58%
Dividend yield		0.00%	0.00%
Weighted-average fair value of warrants (in dollars per share)		$ 2.47	$ 1.16
Long-term Warrants [Member]
Expected price volatility		102.00%	80.00%
Expected term (in years) (Year)		3 years 65 days	4 years 65 days
Risk-free interest rate		1.51%	1.58%
Dividend yield		0.00%	0.00%
Weighted-average fair value of warrants (in dollars per share)		$ 2.55	$ 1.16
Expected price volatility		102.00%	80.00%
Expected term (in years) (Year)		3 years 65 days	4 years 65 days
Risk-free interest rate		1.51%	1.58%
Dividend yield		0.00%	0.00%
Weighted-average fair value of warrants (in dollars per share)		$ 2.55	$ 1.16
October 2015 Warrants [Member]
Expected price volatility	75.50%	96.00%	77.50%
Expected term (in years) (Year)	5 years	3 years 302 days	4 years 302 days
Risk-free interest rate	1.38%	1.66%	1.72%
Dividend yield	0.00%	0.00%	0.00%
Weighted-average fair value of warrants (in dollars per share)	$ 2.82	$ 2.60	$ 1.21
Expected price volatility	75.50%	96.00%	77.50%
Expected term (in years) (Year)	5 years	3 years 302 days	4 years 302 days
Risk-free interest rate	1.38%	1.66%	1.72%
Dividend yield	0.00%	0.00%	0.00%
Weighted-average fair value of warrants (in dollars per share)	$ 2.82	$ 2.60	$ 1.21

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Note 10 - Warrant Liability - Outstanding Warrant Liability (Details) - USD ($)	Dec. 31, 2016	Dec. 31, 2015	Oct. 27, 2015	Dec. 31, 2014	Dec. 31, 2013
July 2011 Warrants, Shares (in shares)	565	1,458		197	192
July 2011 Warrants, Warrant Liability	$ 1,446,000	$ 1,450,000
The 2011 Warrants [Member]
July 2011 Warrants, Shares (in shares)	49
July 2011 Warrants, Warrant Liability	$ 126,000		$ 360,821
Long-term Warrants [Member]
July 2011 Warrants, Shares (in shares)	105
July 2011 Warrants, Warrant Liability	$ 267,000
Short-term Warrants [Member]
July 2011 Warrants, Shares (in shares)	127
July 2011 Warrants, Warrant Liability	$ 312,000
October 2015 Warrants [Member]
July 2011 Warrants, Shares (in shares)	284
July 2011 Warrants, Warrant Liability	$ 741,000
July 2011, Long-term, Short-term, and October 2015 Warrants [Member]
July 2011 Warrants, Shares (in shares)	565
July 2011 Warrants, Warrant Liability	$ 1,446,000

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Note 11 - Stockholders' Equity (Deficit) (Details Textual)												1 Months Ended			3 Months Ended		9 Months Ended		12 Months Ended
	Aug. 01, 2016 USD ($) shares	May 05, 2016 USD ($) shares	Apr. 04, 2016 USD ($) $ / shares shares	Feb. 16, 2016 USD ($) $ / shares shares	Dec. 11, 2015	Oct. 27, 2015 USD ($) $ / shares shares	Oct. 22, 2015	May 22, 2015 USD ($) $ / shares shares	Mar. 06, 2015 USD ($) $ / shares shares	Oct. 16, 2014 USD ($) shares	Mar. 25, 2014 USD ($) $ / shares shares	Oct. 31, 2015 $ / shares shares	May 31, 2015 $ / shares shares	Jul. 31, 2011 $ / shares shares	Dec. 31, 2016 USD ($) $ / shares shares	Sep. 30, 2016 USD ($) shares	Sep. 30, 2016 USD ($) shares	Sep. 29, 2016 $ / shares	Dec. 31, 2016 USD ($) $ / shares shares	Dec. 31, 2015 USD ($) $ / shares shares	Dec. 31, 2014 USD ($) $ / shares shares	Sep. 28, 2016 $ / shares	May 31, 2016 shares	Feb. 29, 2016 $ / shares	Mar. 03, 2015 $ / shares	Dec. 31, 2013 $ / shares
Preferred Stock, Shares Authorized															5,000,000				5,000,000	5,000,000
Units Issued During Period											224,000
Common Stock Shares Per Unit											1
Warrants per Unit											1
Class of Warrant or Right, Number of Securities Called by Each Warrant or Right											6.25
Class of Warrant or Right, Number of Securities Called by Warrants or Rights											56,000				363,523	3,613,284	3,613,284		363,523				2,039,530
Sale of Stock, Price Per Share | $ / shares						$ 5					$ 30
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares											$ 39			$ 33.25	$ 1,810			$ 3.15	$ 1,810	$ 5,190	$ 35,230	$ 19.50				$ 43,000
Warrant Date of Issuance of Term											1 year 180 days
Proceeds from Issuance of Common Stock | $						$ 1,900,000			$ 4,700,000		$ 6,700,000								$ 13,648,000	$ 11,519,000	$ 227,000
Expense Related to Distribution or Servicing and Underwriting Fees | $						$ 400,000			$ 200,000		470,000
Noninterest Expense Offering Cost | $											211,000
Stock Issued During Period, Shares, New Issues				1,518,567		492,000		435,746
Investment Warrants, Exercise Price | $ / shares						$ 5						$ 5
Class of Warrant or Right Issued During Period																			3,087	1,317	55
Private Placement, Commission Percentage			6.00%	6.00%				6.00%
Warrant Expiration Term						5 years						5 years
Stock Issued During Period, Value, New Issues | $				$ 2,800,000
Common Stock, Par or Stated Value Per Share | $ / shares															$ 0.01				$ 0.01	$ 0.01
Proceeds from Warrant Exercises | $															$ 900,000	$ 6,600,000
Class of Warrants or Rights, Exercises in Period															363,523	3,613,284			3,977
Warrants Exercised, Commission Percentage															6.00%	6.00%	6.00%		6.00%
Warrants Exercised, Commission Paid | $															$ 32,000	$ 338,000	$ 338,000		$ 32,000
Noncash or Part Noncash Acquisition, Noncash Financial or Equity Instrument Consideration, Warrants Issued														139,520
Class of Warrant or Right, Exercise Price, Discount from Market Price																		16.00%
Fair Value Adjustment of Warrants | $																			$ 270,000
Preferred Stock, Shares Outstanding															0				0	0
General and Administrative Expense [Member]
Fair Value Adjustment of Warrants | $																	$ 270,000
Maximum [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights						468,280						442,800
Long-term Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares																									$ 16.25
Short-term Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares																									$ 15
July 2011, March 2015, and October 2015 Warrants [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights															363,523	3,613,284	3,613,284		363,523
Proceeds from Warrant Exercises | $															$ 900,000	$ 6,900,000
Private Placement [Member]
Units Issued During Period									370,993
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1,047,121	2,039,530	3,086,651						370,933
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares			$ 1.91
Warrant Date of Issuance of Term													12 years
Proceeds from Issuance of Common Stock | $								$ 7,300,000
Expense Related to Distribution or Servicing and Underwriting Fees | $								$ 900,000
Stock Issued During Period, Shares, New Issues	2,094,241	4,079,058	6,173,299
Unit Purchase Agreement Shares Per Unit | $ / shares								$ 15.75
Investment Warrants, Exercise Price | $ / shares								$ 19.50					$ 19.50
Class of Warrant or Right Issued During Period								217,873					217,873
Warrant Expiration Term			4 years
Common Stock, Par or Stated Value Per Share | $ / shares			$ 0.01
Sale of Stock, Consideration Received on Transaction | $	$ 4,000,000	$ 7,800,000	$ 11,800,000
Number of Sequential Trading Days			5 days
Number of Tranches for Private Placement			2
Private Placement [Member] | Minimum [Member]
Common Stock, Closing Price | $ / shares			$ 4
Private Placement [Member] | Outside Investors [Member]
Unit Purchase Agreement Shares Per Unit | $ / shares									$ 12.50
Private Placement [Member] | Company Insiders [Member]
Unit Purchase Agreement Shares Per Unit | $ / shares									$ 15
Private Placement [Member] | Long-term Warrants [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights									278,200
Warrant Date of Issuance of Term									5 years
Investment Warrants, Exercise Price | $ / shares									$ 16.25
Warrant Expiration Term							5 years
Private Placement [Member] | Short-term Warrants [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights									370,933
Warrant Date of Issuance of Term									1 year 90 days
Investment Warrants, Exercise Price | $ / shares									$ 15
Warrant Expiration Term							1 year 90 days
Mr. Fu [Member]
Stock Issued During Period, Shares, New Issues				696,590
Shares Issued, Price Per Share | $ / shares				$ 1.81
Mr. Fu [Member] | July 2011, March 2015, and October 2015 Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares																								$ 1.81
Shares Issued, Price Per Share | $ / shares																								$ 1.81
Pioneer Pharma Co. [Member]
Stock Issued During Period, Shares, New Issues				696,590
Shares Issued, Price Per Share | $ / shares				$ 1.91
Mr. Sieczkarek [Member]
Stock Issued During Period, Shares, New Issues				125,387
Shares Issued, Price Per Share | $ / shares				$ 1.91
Ascendiant Capital Markets [Member]
Proceeds from Issuance of Common Stock | $																					1,200,000
Maximum Common Stock Aggregate Proceeds Pursuant to Offering Agreement | $										$ 10,000,000
Percent of Gross Proceeds on Common Stock Sold, Commissions										3.00%
Stock Issued During Period, Shares, New Issues										1,300,000
Sales Commissions and Fees | $																					81,000
China Kington Asset Management Co. Ltd. [Member] | Private Placement [Member]
Payments of Stock Issuance Costs | $			$ 618,000	$ 155,000				$ 408,000
Net of Offering Costs and Commissions [Member]
Proceeds from Issuance of Common Stock | $						$ 2,300,000			$ 4,500,000		$ 6,000,000
Net of Offering Costs and Commissions [Member] | Private Placement [Member]
Proceeds from Issuance of Common Stock | $								$ 6,400,000
Net of Offering Costs and Commissions [Member] | Ascendiant Capital Markets [Member]
Proceeds from Issuance of Common Stock | $																					$ 1,100,000
In Exchange for Waiver [Member] | Private Placement [Member]
Stock Issued During Period, Shares, New Issues								635,000
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio					25														25

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Note 11 - Stockholders' Equity (Deficit) - Outstanding Warrants (Details) - $ / shares	3 Months Ended		12 Months Ended
	Dec. 31, 2016	Sep. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Outstanding, Warrants (in shares)			1,458	197	192
Outstanding, Weighted average exercise price (in dollars per share)			$ 5,190	$ 35,230	$ 43,000
Warrants granted, Warrants (in shares)			3,087	1,317	55
Warrants granted, Weighted average exercise price (in dollars per share)			$ 1,910	$ 7,400	$ 39,000
Warrants expired, Warrants (in shares)			(3)	(56)	(50)
Warrants expired, Weighted average exercise price (in dollars per share)			$ 78,130	$ 39,000	$ 68,750
Outstanding, Warrants (in shares)	565		565	1,458	197
Outstanding, Weighted average exercise price (in dollars per share)	$ 1,810		$ 1,810	$ 5,190	$ 35,230
Warrants exercised, Warrants (in shares)	(363,523)	(3,613,284)	(3,977)
Warrants exercised, Weighted average exercise price (in dollars per share)			$ 1,950

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Note 12 - Equity-based Compensation (Details Textual) - USD ($)			1 Months Ended						3 Months Ended				6 Months Ended	12 Months Ended				46 Months Ended
	May 26, 2016	May 30, 2015	Jan. 31, 2016	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2012	Jan. 31, 2011	Jan. 31, 2010	Jun. 30, 2016	Mar. 31, 2016	Jun. 30, 2015	Mar. 31, 2015	Sep. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2015	Dec. 31, 2014	Oct. 31, 2012	Dec. 31, 2012	Oct. 31, 2007
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period														2 years 7 days
Proceeds from Stock Options Exercised																$ 4,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic Value														0		$ 4,000	$ 32,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized														$ 1,500,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross														1,227,000		85,000	68,000
Allocated Share-based Compensation Expense														$ 1,751,000		$ 1,382,000	$ 1,042,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period														0			2,000
Employee [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross														1,139,000	59,000		52,000
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period														64,000		16,000	2,000
Allocated Share-based Compensation Expense														$ 1,489,000		$ 1,193,000	$ 853,000
Mr. Cashion and Mr. Wicks [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period											4 years	90 days
Allocated Share-based Compensation Expense											$ 185,000
Mr. Cashion and Mr. Wicks [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period									90 days	4 years
Mr. Radaelli and Mr. McPherson [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Plan Modification, Incremental Compensation Cost													$ 58,000
Exercised [Member]
Proceeds from Stock Options Exercised														$ 0		0	34,000
The 2007 Omnibus Incentive Plan [Member]
Common Stock, Capital Shares Reserved for Future Issuance																				40,000
Annual Increase, Number of Shares, Percentage																			4.00%
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized	1,124,826	82,461		32,646	59,157	40,000	37,427	37,207
Increase (Decrease) in Number of Shares Available for Grant			139,449
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	2,318,486
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant														53,587
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent														100.00%
Share-based Compensation Arrangement by Share-based Payment Award Threshold Purchase Price of Common Stock Percent														10.00%
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period														10 years
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period														4 years
The 2007 Omnibus Incentive Plan [Member] | Shareholder of More Than 10% [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Purchase Price of Common Stock, Percent														110.00%
The 2007 Omnibus Incentive Plan [Member] | Maximum [Member]
Increase (Decrease) in Number of Shares Available for Grant																		40,000
Percentage of Number of Common Shares Outstanding																		4.00%
Nonemployees [Member]
Allocated Share-based Compensation Expense														$ 262,000		$ 188,000	$ 189,000
Share-based Goods and Nonemployee Services Transaction, Quantity of Securities Issued														89,000		27,000	14,000
Stock Issued During Period, Shares, Issued for Services														41,000		500	600

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Note 12 - Equity-based Compensation - Stock Options Outstanding (Details) - USD ($) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2013
Options outstanding (in shares)	388,000	323,000	287,000
Weighted-average exercise price, outstanding (in dollars per share)	$ 32.03	$ 38.25	$ 42
Weighted-average remaining contractual life, outstanding (Year)	8 years 255 days	6 years 73 days	6 years 109 days	6 years 219 days
Aggregate intrinsic value, outstanding	$ 702	$ 19	$ 23	$ 422
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	1,227,000	85,000	68,000
Weighted-average exercise price, options granted (in dollars per share)	$ 2.74	$ 11.20	$ 22.50
Options exercised (in shares)	0		(2,000)
Weighted-average exercise price, options exercised (in dollars per share)			$ 14
Options forfeited/cancelled (in shares)	(116,000)	(28,000)	(29,000)
Weighted-average exercise price, options forfeited/cancelled (in dollars per share)	$ 28.27	$ 30.58	$ 36.50
Options outstanding (in shares)	1,489,000	388,000	323,000	287,000
Weighted-average exercise price, outstanding (in dollars per share)	$ 8.38	$ 32.03	$ 38.25	$ 42
Options granted (in shares)	1,227,000	85,000	68,000
Weighted-average exercise price, options granted (in dollars per share)	$ 2.74	$ 11.20	$ 22.50
Weighted-average remaining contractual life, outstanding (Year)	8 years 255 days	6 years 73 days	6 years 109 days	6 years 219 days
Options, vested and expected to vest (in shares)	1,466,000
Weighted-average exercise price, vested and expected to vest (in dollars per share)	$ 8.45
Weighted-average remaining contractual life, vested and expected to vest (Year)	8 years 219 days
Aggregate intrinsic value, vested and expected to vest	$ 691
Options, vested (in shares)	402,000
Weighted-average exercise price, vested (in dollars per share)	$ 22.45
Weighted-average remaining contractual life, vested (Year)	6 years 219 days
Options, exercisable (in shares)	402,000
Weighted-average exercise price, exercisable (in dollars per share)	$ 22.45
Weighted-average remaining contractual life, exercisable (Year)	6 years 219 days
Restricted Stock Units (RSUs) [Member]
Restricted stock units granted (in shares)	104,000	16,000	3,000
Restricted stock units vested (in shares)	(114,000)	(6,000)	(4,000)
Restricted stock units granted (in shares)	104,000	16,000	3,000
Restricted stock units vested (in shares)	(114,000)	(6,000)	(4,000)
Restricted stock units cancelled (in shares)		(2,000)

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Note 12 - Equity-based Compensation - The Weighted-average Assumptions Used in Determining the Value of Options Granted (Details) - Employee [Member] - $ / shares	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Expected price volatility	84.47%	77.22%	76.88%
Expected term (in years) (Year)	7 years 10 days	6 years 292 days	6 years 182 days
Risk-free interest rate	1.57%	1.76%	2.06%
Dividend yield	0.00%	0.00%	0.00%
Weighted-average fair value of options granted during the period (in dollars per share)	$ 2.06	$ 7.35	$ 15.25

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Note 12 - Equity-based Compensation - The Weighted-average Assumptions Used in Determining the Value of Options Granted Non-employee (Details) - Nonemployees [Member] - $ / shares	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Expected price volatility	87.68%	83.77%	79.10%
Expected term (in years) (Year)	10 years	9 years 219 days	8 years 219 days
Risk-free interest rate	1.61%	2.18%	2.28%
Dividend yield	0.00%	0.00%	0.00%
Weighted-average fair value of options granted during the period (in dollars per share)	$ 2.29	$ 7.15	$ 15.25

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Note 12 - Equity-based Compensation - Summary of the Stock-based Compensation Expense Included in Results of Operations (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Allocated Share-based Compensation Expense	$ 1,751	$ 1,382	$ 1,042
Research and Development Expense [Member]
Allocated Share-based Compensation Expense	195	449	376
Selling and Marketing Expense [Member]
Allocated Share-based Compensation Expense	132
General and Administrative Expense [Member]
Allocated Share-based Compensation Expense	$ 1,424	$ 933	$ 666

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Note 13 - License, Collaboration and Distribution Agreements (Details Textual) - USD ($)			1 Months Ended				2 Months Ended	9 Months Ended	12 Months Ended
	Jun. 01, 2013	Feb. 07, 2012	Jan. 31, 2013	Oct. 31, 2012	Sep. 30, 2012	Jan. 31, 2012	Oct. 31, 2012	Sep. 30, 2014	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Mar. 25, 2014
Fees and Commissions, Other						$ 312,500
Contracts Revenue			$ 312,500								$ 625,000
Class of Warrant or Right, Number of Securities Called by Each Warrant or Right												6.25
Tranche One [Member]
Purchase Agreement Units					800,000
Purchase Agreement Unit Price Per Share					$ 1.25
Tranche Two [Member]
Purchase Agreement Units				1,200,000
Purchase Agreement Unit Price Per Share				$ 1.25
Purchase Unit Agreement Total Units Fair Value				$ 3,500,000
Reallocated from Deferred Revenue [Member]
Stockholders' Equity, Period Increase (Decrease)							$ 600,000
Restricted Stock Purchase [Member]
Contracts Revenue							2,500,000
Excess Fair Value Over Proceeds Received From Purchase							$ 1,000,000
Maximum [Member]
Sales Discounts, Goods								$ 500,000
Pioneer Pharma Co. [Member] | Restricted Stock [Member]
Unit Purchase Agreement Shares Per Unit							$ 1
Class of Warrant or Right, Number of Securities Called by Each Warrant or Right				1			1
Virbac [Member]
Deferred Revenue									$ 246,000
Neutrophase [Member]
Deferred Revenue									1,000,000	$ 1,100,000	1,200,000
Integrated Healing Technologies, LLC [Member]
Deferred Revenue									653,000	674,000	679,000
Commission Payment Received Upfront		$ 750,000
Principal Business Enterprise, Inc. [Member]
Deferred Revenue									194,000	195,000	196,000
Commission Payment Received Upfront	$ 200,000
Avenova Distribution Agreements [Member]
Deferred Revenue									1,924,000	24,000
Contracts Revenue									$ 7,300,000	$ 947,000	$ 4,000

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Note 13 - License, Collaboration and Distribution Agreements - Deferred Revenue (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Product sales	$ 11,617	$ 4,146	$ 684
Total revenue recognized	11,897	4,381	1,054
Pioneer Pharma Co. [Member] | Neutrophase [Member]
Amortization of upfront technology access fee	94	25	47
Product sales	324	70	161
Total revenue recognized	418	95	208
Integrated Healing Technologies, LLC [Member] | Neutrophase [Member]
Amortization of upfront technology access fee	21	5	7
Product sales	332	34	101
Total revenue recognized	353	39	108
Principal Business Enterprise, Inc. [Member] | Neutrophase [Member]
Amortization of upfront technology access fee		1	4
Product sales	22	66	104
Total revenue recognized	22	67	108
Materials Equipment And Contract Study Costs [Member] | Virbac [Member]
Other Income			$ 39

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Note 14 - Employee Benefit Plan (Details Textual) $ in Thousands	12 Months Ended
	Dec. 31, 2016 USD ($)
The 401(k) Plan [Member]
Defined Contribution Plan, Employer Discretionary Contribution Amount	$ 0

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Note 15 - Income Taxes (Details Textual) $ in Millions	Dec. 31, 2016 USD ($)
Domestic Tax Authority [Member] | Internal Revenue Service (IRS) [Member]
Tax Benefits Compensation and Benefits, Share-based Compensation Cost	$ 1.1
State and Local Jurisdiction [Member] | California Franchise Tax Board [Member]
Tax Benefits Compensation and Benefits, Share-based Compensation Cost	$ 0.7

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Note 15 - Income Taxes - Federal and State Income Tax Provisions (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Current
State	$ 2	$ 2	$ 2
Total current tax expense	2	2	2
Deferred
Income tax provision	$ 2	$ 2	$ 2

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Note 15 - Income Taxes - Summary of Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Deferred tax assets:
Net operating losses	$ 34,902	$ 31,464
Accruals	287	403
Deferred revenue	829	954
Stock options	1,894	1,558
Other deferred tax assets	765	652
Total deferred tax assets	38,677	35,031
Deferred tax liabilities:
Property and equipment	(32)	(28)
Total deferred tax liabilities	(32)	(28)
Valuation allowance	(38,645)	(35,003)
Net deferred taxes

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Note 15 - Income Taxes - Valuation Allowance (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Valuation allowance	$ 3,642	$ 8,101	$ 6,286

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Note 15 - Income Taxes - Summary of Tax Credit Carryforwards (Details) $ in Thousands	Dec. 31, 2016 USD ($)
State and Local Jurisdiction [Member]
Tax Credits	$ 282
Expiration Years 2024 - 2036 [Member] | Domestic Tax Authority [Member] | Internal Revenue Service (IRS) [Member]
Net Operating Losses	90,165
Expiration Years 2028 - 2036 [Member] | State and Local Jurisdiction [Member]
Net Operating Losses	78,219
Expiration Years 2031 - 2036 [Member] | Domestic Tax Authority [Member] | Internal Revenue Service (IRS) [Member]
Tax Credits	$ 1,316

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Note 15 - Income Taxes - Effective Income Tax Rate Reconciliation (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Income tax provision (benefit) at federal statutory rate	$ (4,471)	$ (6,439)	$ (5,154)
State tax	(157)	(1,060)	(818)
ISO-related expense for GAAP	52	164	144
Change in valuation allowance	3,641	8,101	6,286
Revaluation of warrant liability	806	(731)	(565)
Tax credits	(31)	(123)	(44)
Other	162	90	153
Total	$ 2	$ 2	$ 2

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Note 15 - Income Taxes - Unrecognized Tax Benefit (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Unrecognized benefit - beginning of period	$ 957	$ 811
Gross increases - current period tax positions	17	76
Unrecognized benefit - end of period	$ 974	$ 957

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Note 16 - Related Party Transactions (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Accounts Receivable, Related Parties	$ 75,000	$ 0
China Kingston [Member] | Related-party Commission Fees [Member]
Related Party Transaction, Expenses from Transactions with Related Party	1,100,000	408,000	$ 0
Amortization Revenue [Member] | Neutrophase [Member]
Other Income	$ 418,000	$ 95,000	$ 208,000